Buying a home is one of the biggest decisions most people will make in their lifetime. So, it’s only natural that they want to know everything they can before jumping into the marketplace.
Unfortunately, far too many people turn to their friends and family for advice before they seek out recommendations from a professional.
This has led to the proliferation of several myths about mortgages that just don’t seem to go away.
So, let’s take a look at some of the most common beliefs and assumptions that a lot of buyers make and see if we can permanently bust these myths before you start looking for your new home.
You Need to Put 20% Down
One of the first things people ask when they want to buy a new home is: “Do I need a 20% down payment?”
This isn’t surprising, since there was a time when putting 20% down was pretty much the standard practice.
That’s a lot of money, though, and one of the main reasons potential homebuyers never take that first step.
They’ve simply heard this number put out there too often, and they don’t think there’s any way around it. The fact of the matter, though, is that less than a fourth of home buyers actually put 20% down.
In the current market, most loans actually only require about 6% down, and an FHA loan can require as little as 3.5% down. The VA, on the other hand, may be able to help qualified applicants get a loan with no money down at all.
There are several other payment assistance programs and grants out there, too. Many of them are specifically meant for a first-time homebuyer, so be sure to ask about all of your options.
It’s true that a higher down payment can help lower your monthly payments, but 20% is not a requirement to get a loan.
Low Credit Equals Low Chance to Get a Home
The second most common question we get is: “Can I buy a home with a low credit score?”
The simple answer is: yes. It’s very possible to buy a home even when your credit could use a little help.
Not many people have a perfect credit score, and most lender realize that. So, if you can show that you have a steady income and that your current bills are paid on time, there are some options available to you.
If your credit score has totally tanked, of course, that is something you’ll have to take care of first. However, if it’s just a little less than where you’d like it, you may be eligible for a number of different programs.
For example, a conventional loan will usually require a credit score over 620. However, you can still apply for an FHA loan with a credit score of 500, if you can also provide a down payment of 10% to help offset any risk. A score of 580 will make you eligible for an FHA loan and some down-payment assistance and will only require a payment of 3.5%.
There are some other options, too. You could find someone who has better credit to co-sign the loan with you, or, if you have enough cash, you could put down more than 20% as a down payment to offset any perceived risks.
One final thing to remember, though, is that your credit score will have an impact on your interest rate, so if you have an opportunity to work on increasing your credit score before you start this process, it can certainly help you in the long run.
I’m Pre-qualified, So Obviously I’m Pre-approved
Getting pre-qualified is, generally speaking, a fairly simple thing to accomplish. In most cases, you can just answer a few questions about your financial situation and that’s about it.
In other words, it’s a basic estimate of an amount you could get approved for, but it is certainly no guarantee.
And it’s because of this simplicity that the term gets used a lot in the market.
However, pre-approval is actually a very different process and requires a lot more information.
For pre-approval, a lender will look at your financials and decide on the maximum loan amount they’d be willing to give, and they’ll provide a letter stating your approved loan amount.
Pre-qualification may be a good stepping stone, but sellers are far more interested in what you’ve actually been approved for because that shows you’re serious about buying a home.
Being Pre-approved Means the Loan is Yours
Pre-approvals look better to sellers, but it does not mean the home and the loan are in your pocket.
In fact, the loan will not be yours until the seller accepts your offer, the lender has the home appraised and runs another credit check, reviews more documents, and finally has you sign the loan papers.
The pre-approval doesn’t mean you have the money to spend, it just provides a little comfort to the seller, letting them know that you’re a serious buyer who qualifies for a loan of a certain amount.
A Down Payment is the Only Major Upfront Cost
Often, buyers worry so much about that 20% down payment (which, as we already covered, isn’t even necessary) that they begin to assume that this is the only major expense when they close on the house.
While your down payment will be a big part of your costs, it isn’t the only one that you need to be aware of. There are a number of closing costs that usually add up to 1 or 2% of the sale price.
These costs can be split between the buyer and the seller, but in some cases – when you don’t have the fund to cover those costs – you can negotiate with the seller to cover a portion or all of them depending on the type of loan.
Mortgage Rates are All That Matter and They’re the Same Everywhere
Getting the lowest interest rate possible is, obviously, an important part of this process, but it’s not the only thing to consider.
The annual percentage rate (APR) is also an important factor in this process. This includes the origination and processing fees – which can be very different between different lenders. In other words, even though you found a lender offering some low mortgage rates, they may change some surprisingly high up-front fees.
This is just one more reason to shop around for the best lender.
Many buyers believe that the mortgage rate won’t change between lenders, but that’s just not true. There are many factors and variables that can change the mortgage rate between different lenders.
Even a fraction of a percentage can make a big difference in the long run, saving you thousands of dollars, so take the time to shop around and find the very best rate possible. If you get the best rate possible up front, you won’t have to worry about refinancing later.
Shopping Around Can Hurt Your Credit Rating
Yes, it’s possible for multiple inquiries to lower a credit score, but it’s not something you have to worry about in this case. These agencies understand that rate shopping is going to happen, and their system is created accordingly.
FICO, for example, counts all similar inquiries made within a 30-day period as a single inquiry. So, you should definitely shop around as much as you want in that window of opportunity.
Consult with a Professional
The best way to avoid mortgage myths like these is to consult with a professional who really understands the ins and outs of the marketplace.
Contact Joshua Downeytoday to learn more about your mortgage options and how they can impact your homebuying experience.