Feb. 8, 2019.
Do you really need a 20-percent mortgage down payment? When should you get prequalified? And what’s a good mortgage rate anyway? Finding out the truths behind these mortgage myths could make life a lot easier for a first-time buyer.
10 really common mortgage myths, busted
Most potential buyers have a misconception or two about homeownership. Stop us if you’ve heard these before:
1. Myth: You have to have 20 percent down.
A 20-percent down payment is a great goal, but most people can’t afford to (or don’t have 7.2 years to) save up that much money to buy a house.
The good news is that there are several specialized programs available for borrowers who can’t afford a down payment:
- A government-backed FHA loan lets qualifying borrowers put as little as 3.5 percent down.
- A USDA loan doesn’t require a down payment as long as a borrower chooses a home in a qualifying rural area.
- A VA loan has a 0-percent minimum down payment for the military veterans and active service members who qualify.
- FHA and VA loan limits also recently increased, which means you could buy more at a lower down payment. And, there are likely to be Down Payment Assistance programs in your state.
If you can’t afford 20-percent down, you may have to pay for Private Mortgage Insurance (PMI). PMI assures that your lender is not responsible if you miss your payments and foreclose on your house. Once you’ve paid off 20 percent of your home, you may not have to pay for PMI any longer. Talk to your lender about removing your PMI once your LTV, or loan-to-value ratio, reaches 80 percent.
2. Myth: You don’t have the $$$ for a home.
You may think you can’t afford a home, but have you ever added up how much it costs you to rent for a year? Rents are rising, and even in areas where a monthly mortgage matches monthly rent, homeownership can start to pay off — in thousands of dollars in profit — in about four years.*
If you’re buying a home for the first time, you can also:
- Take advantage of specialty programs that help with closing costs. The Mortgage Credit Certificate is a tax credit of up to $2,000 you can claim for each year you have a mortgage.
- Qualify for a down payment and closing cost assistance program, like the HOMEstead program. This program is a second mortgage loan with no interest that can help qualifying borrowers get up to $10,000 in assistance.
- Ask your seller to cover closing costs, which they may be more likely to do in slower seasons or if you’ve paid their asking price. Seller-paid closing costs also have the potential to save you thousands.
3. Myth: You have to have the world’s most amazing credit score.
Your credit score doesn’t have to be flawless for you to be able to find a mortgage that fits your budget. It surprises many when they talk to a lender and realize that they can still qualify, even with a lower score. Take an FHA loan as a quick example: Did you know your qualifying credit score can be as low as 620?**
4. Myth: Getting pre-qualified isn’t that important.
Most people get so excited about finding a home that they don’t bother getting prequalified before talking to a realtor. This can hurt their chances because many realtors (and some sellers) will ignore a buyer who isn’t prequalified with a reliable, and often local, lender. Getting prequalified online is the first step to finding out how much home you can afford. The prequalification process can help you get a realistic perspective of your price range so you don’t’ waste time house-hunting.
5. Myth: You’ll never get past the government’s lending requirements.
The mortgage industry is highly regulated. So, it’s not unusual for lending requirements to change. But tight lending requirements shouldn’t keep you from exploring your options. A trustworthy lender can help you figure out if you meet loan requirements and come up with alternative solutions.
6. Myth: Get the lowest interest rate — no matter what.
You’ve seen those mortgage ads for “Lowest rates!” They’re the equivalent of a car salesman telling you he’s got the “best deal in town” but then neglects to mention hidden fees.
When you’re shopping for a home loan, a low interest rate is important — but it’s not the only thing:
- You have to factor in closing costs, mortgage insurance (if you put less than 20 percent down), homeowners’ association fees, maintenance costs, and more.
- You also have to subtract your tax savings, not over the life of the loan, but over the time frame in which you’re likely to have the mortgage.
A good lender will help you figure out a loan scenario that will help you save the most on your mortgage. For instance, depending on how long you’re planning to live in a home, you may save more by paying a higher interest rate to get less in closing costs, but that can be hard to put together without the help of a licensed mortgage professional.
7. Myth: It doesn’t matter who your lender is.
A lot of people think that if they find the right home and the right realtor, they’re good to go. But if something falls through in the home financing process, you could lose the home you truly wanted to someone who actually had a lender that was there for them. The housing market has had a resurgence in buyers, some of whom are willing to pay for their home with cash. Working with a full-service lender that offers a loan program like Early Bird Approval, where you can get full loan approval before you even bid to make as close to a cash offer as possible, could get you home faster in a competitive market and with fewer delays.
8. Myth: The big banks are the ones who have it together.
Most people don’t want to spend time looking for a lender. They’d rather pick a big bank because their “big name” makes them seem more reliable. But it’s harder to find quality service at a big bank. Oftentimes, the department that processes loans doesn’t know anyone in the underwriting department. So when it comes time to close on a loan, it can take much longer to communicate.
Consider choosing a mortgage company that:
- Values great customer service.
- Has in-house processing, funding, and underwriting teams.
- Is a direct lender that makes all loan decisions, ensuring your loan process runs more smoothly.
9. Myth: All you have to worry about is your monthly payment.
When you mortgage a home, you have to pay for initial costs like closing costs, origination fees, appraisal fees, and more. You also have to pay for long-term costs like property taxes and homeowner’s insurance. It’s important to count these costs when you’re determining what you can afford. Think about your first year of homeownership and all the years to come — your loan officer can help you decide if you can support your big-picture mortgage on your current income.
Got questions? Ask your loan officer anything. (Really, that’s what we’re here for.)
10. Myth: Getting a mortgage is super stressful.
You may have heard the horror stories before.
“They lost my paperwork!”
“The closing date fell through.”
“I’ve been waiting 45 days now!”
These things happen, but they don’t have to happen to you. Think of your lender as your home finance “wedding planner.” They’re responsible for making your closing as effortless as possible. They get your loan processed, funded, and underwritten to meet your closing date on time. And a really great lender could get you home three weeks faster than the industry average.
Before you choose your lender, ask them how many times they’ve closed on time in the past month. You can also ask them about their most recent success and failure. Digging a little deeper before you give a lender your business could make your mortgage stress-free. Because buying a house doesn’t have to be hard, and because working with a local loan officer can feel like working with a friend: Click here to get connected.
*MBS Highway payment estimate, 2018. Rates listed are for illustrative purposes only.
**Not all borrowers with a 620 credit score will qualify.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.