Buying a home is a great way to grow equity and invest in your future. But first-time home buyers believe several myths about mortgages, such as IMortgage Myths Debunked, that may keep them from buying a home. Learn about these common myths and the facts that can help get you into the home you want with this blog!
Myth #1: You Need a 20% Down Payment to Buy a Home
One of the most widespread myths about buying a home is the need for a 20% down payment to afford the home. The myth exists because most mortgage companies suggest a 20% down payment which is typically an indication of your financial stability.
However, many options exist to help those who need payment assistance or cannot put down 20% of the purchase price.
- Additional mortgage insurance is an option for those seeking a conventional loan but doesn’t have the required 20% down payment. For loans with less than a 20% down payment, you will need private mortgage insurance, typically in monthly premiums.
Mortgage insurance is usually 1% of your loan balance per year. If choosing to go with additional mortgage insurance, you may be able to put down as little as 3 or 5% as a down payment.
- An FHA loan (Federal Housing Administration) is a loan program insured by the federal government that offers down payments as low as 3.5%.
- VA loans, available to U.S. servicemembers and veterans, are offered by the Department of Veterans Affairs and have many benefits, including no down payment.
Myth #2: You Can’t Get a Mortgage if You’re Self-Employed
This myth is based on the idea that most lenders require you to submit your current W-2 to prove your monthly and yearly income. Because self-employed people do not have a W-2, many believe a lender will automatically deny their loan application. But this simply isn’t true.
If you’re self-employed, you must provide lenders with copies of your tax returns (usually the last two years) to show you are producing sufficient and reliable income. To help ensure a successful loan application, it’s also a good idea to pay off any outstanding debt before applying; this improves your debt-to-income ratio and increases your financial standing in the eyes of the lender.
Depending on the prospective home, you may also want to save a larger down payment that may help to prove a better financial situation.
Myth #3: You Have to Have Perfect Credit to Get a Mortgage
While it is true that better credit scores are more likely to be approved for loans and have better interest rates and terms, you don’t need perfect credit to be approved for a mortgage.
Credit score criteria vary between lenders and the type of house you’re purchasing, but scores typically need to be above 620. This is the lowest most lenders will go for convention loans and VA loans. However, FHA and USDA loans may go as low as 500 or 580, respectively.
However, it’s important to remember that the lower your credit score, the more important other factors of your financial situation will become. For example, someone with lower credit may need to put down a larger down payment, show proof of a larger income, and lower debt-to-income ratio than those with better credit.
Myth #4: A Pre-Qualification is the Same as Getting Approved for a Mortgage
Many people believe that getting pre-qualified by a lender is the same as getting approved. Unfortunately, this is not true. Pre-qualification is a review of your credit score and bank statements to create an estimated loan amount for which you will be approved.
Most real estate agents will want to see that buyers have been pre-qualified before working together to ensure they are looking at houses buyers will be approved for and not waste the time of the agent, seller, or buyer looking at too-expensive options.
To get approved for a mortgage, borrowers must still go through underwriting, a more in-depth process of verifying financial information that looks again at the credit score and bank statements, as well as pay stubs for the last 30 days.
W-2s for the past two years, tax returns, and information on other debt such as student loans, credit cards, car payments, alimony, and child support. This process can take just a few days to many weeks, depending on the complexity of the finances.
To increase your chances of getting approved for a mortgage after your pre-qualification, don’t make any big purchases that might significantly decrease your savings or increase your credit card balance.
Don’t take out other loans, such as a car loan, that will temporarily lower your credit score and increase your debt-to-income ratio.
These things can significantly reduce your chances of getting approved for your mortgage. Even if you are approved, you may have a higher interest rate than you would have had you waited to make these changes or purchases.
Myth #5: Renting is Cheaper Than Buying a Home
This is a myth many first-time buyers may still believe. Many believe this because the initial costs of moving into a rental property are much lower than buying a home, typically reserved to a deposit equal to your monthly rent.
The myth of needing to pay a 20% down payment, closing costs, and realtor fees can quickly add up in the mind of those looking for a new home.
However, while there are more initial fees when buying a home, most of these can be rolled into your loan, be part of any down payment you put down, or be negotiated into the deal to be paid by the seller.
The critical thing to remember is that when paying rent, you are giving your money to someone else. When you pay your mortgage, you pay yourself in the form of equity. The money you pay every month can be earned back when you sell your home in the future or can be considered savings when you pay your mortgage off, allowing you to live rent-free in your later years.
Plus, in the short term, you can often pay less monthly mortgage payments for a similar home than rent because most landlords also pay a mortgage. So if a home has a mortgage payment of $1,500 per month, as the owner, you would pay $1,500, whereas if you were renting, you may pay $1,800 to ensure the landlord can pay their mortgage and make money on their rental property.
Also, if you have a fixed rate mortgage, you can be confident that your monthly payments won’t increase, whereas when renting, your landlord can change your rental agreement at the end of each lease contract.
Learn More About Mortgages with Finance is us
If you’re looking to buy a home, it’s essential to be informed and knowledgeable about mortgage loans before you search for lenders or start the application process. Finance is us can help you understand all the financial aspects of the home buying process, including the different types of mortgages, how to apply for a home loan, and tips for mortgage refinancing down the road.
Whether you’re just starting to think about buying a home or want to improve your credit to help you buy one in the future, we can help you navigate your unique financial situation and get you the home you want.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.