Do you need a 20 percent mortgage down payment? When should you get prequalified? What’s a good mortgage interest rate?
These mortgage myths are must-read for anyone thinking about buying their first home:
1. Myth: You have to have 20 percent down or else.
A 20 percent down payment is a great goal, but most people can’t afford to save up that much money before buying a home. The good news is that there are many specialized programs available for borrowers who can’t afford a down payment.
For example, with a government-backed FHA loan, qualifying borrowers can put as little as 3.5 percent on their home.
With a USDA loan, borrowers don’t need a down payment as long as they choose a home in a qualifying rural area. Both of these programs have strict qualifications, so be sure to ask your lender if these are the right options for you.
If you can’t afford a 20 percent down payment, 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 home. That makes lenders more willing to lend to you even if you don’t have a 20 percent down payment. It also means that you will have to be careful to finance a home that you can afford. Once you’ve paid off 20 percent off your home, you may not have to pay for your 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? When you get a mortgage, the money you’re spending goes toward you. That means you are getting a real return on your investment as the years go by.
Most people are afraid to buy a home because it is a big commitment. When you get a mortgage, you have to consider expenses like closing costs, appraisal costs, title costs, and more. You also have to consider how much it costs to keep your home in good condition.
But with rent prices rising every year, it can actually be cheaper to get a mortgage — if you play your cards right. You can choose to live in a less expensive area or find a home that has only the space you need.
If you’re buying a home for the first time, you can also take advantage of specialized programs that help with closing costs. For example, the Mortgage Credit Certificate is a tax credit of up to $2,000 that you can claim for each year that you have a mortgage. You could also 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.
Curious? Ask your lender about what’s possible — it’s more than you know.
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 credit score.
For example: Did you know that with an FHA loan, a borrower’s qualifying credit score can be as low as 620?*
If you have a helpful lender, they can help you come up with an action plan and find a mortgage program that works for you.
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 they talk to a realtor. This can hurt their chances because many realtors will ignore a buyer who is not prequalified with a reliable lender.
Getting prequalified online is the first step to finding out how much home you can afford.
From there, your lender may walk you through Credit Approval. The prequalification process can help you and your lender get a realistic perspective of what you can actually afford, so that when you do go house-hunting, you’ll know when to say “yes” or “no.”
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 at any point. But tight lending requirements shouldn’t keep you from exploring your options.
If you have a trustworthy lender, they can help you figure out if you meet the requirements for buying a home.
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 that’s important.
You have to factor in closing costs, mortgage insurance (if you put less than 20 percent down on the home), homeowners association fees, maintenance costs, and more. Plus, you 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 example, 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 that scenario 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 who 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. How are you going to be competitive if you don’t have a great lender who your realtor can trust to come through on your loan?
8. Myth: The big banks are the ones who have it together.
Most people don’t want to spend time looking for a good lender. They would 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 so much longer to communicate each part of the process.
Consider choosing a mortgage company that values great customer service. Look for a company with an in-house processing, funding, and underwriting team. When everything is in-house, your loan process will run 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 consider those costs into your calculations when you are determining if you can afford a home in the long term. Think about your first year of home ownership and all the years to come — can you support your mortgage on your current income?
Don’t forget to ask your lender for help — a good lender will help you!
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 to a lot of people, but they don’t have to happen to you. Think of your lender as your home finances “wedding planner.” They’re responsible for making sure your closing is as smooth as possible. They make sure that it’s processed, funded, and underwritten in time for your closing date.
Before you choose a lender, ask them how many times they have closed on time in the past month. You can also ask them about their most recent success and failure. If you make sure they can help you before you give them your business, your mortgage can be stress-free. Got more questions about the mortgage process? Don’t hesitate to reach out — we’re here to make buying a house easy.
*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.