8 Mortgage Misconceptions: Debunking Common Borrowing Myths
Buying a home is one of the most significant financial decisions you’ll make in your lifetime. Because truth is power when it comes to being informed, we want to debunk some of the falsehoods you may hear about the borrowing process and clear up what we have termed: mortgage myths.
Myth #1: You Need Perfect Credit to Buy a House
Many potential homebuyers put off buying a home due to credit mishaps or the belief that they need a perfect credit score to get a mortgage. Fortunately, this is a myth that can easily be discredited (please, pardon our pun).
While a higher credit score may qualify you for more loan types, and possibly a lower interest rate, you will likely still be eligible for a mortgage even with average credit. For example, you might qualify for a conventional or FHA loan with a credit score of 620.
However, you may not be eligible for immediate financing if you’ve had serious mistakes in your past, such as outstanding collections or judgements against you. Rather than pressing the panic button, talk to a trusted loan officer. They’ll give you educated advice about clearing up these past issues, and you can improve your credit score so you’ll be ready when it’s time to apply.
Myth #2: You Can’t Have Debt and Buy a Home
If you’ve got a car payment or a credit card balance, you may be thinking that lenders won’t approve you for a mortgage. Fortunately, this isn’t true!
It’s actually your credit utilization score that matters most to your lender. Credit utilization refers to the amount of credit available to you when compared to how much you are using.
For example, if you have two credit cards with limits of $3,000 each, and you owe $1,000 across the two lines of credit, your credit card utilization would around 17%, assuming you don’t have other outstanding debt. This puts you in the sweet spot for lenders, because eligible borrowers need to have some credit, to establish a history, but shouldn’t be maxed to their limits.
Another factor lenders will consider is your debt-to-income ratio (DTI). Simply put, the DTI is a measurement that compares your monthly debt payments to your gross monthly income. In general, your DTI should be around 45%, or lower, depending on the type of mortgage loan for which you will apply.
Myth #3: You Need to Put 20% Down to Buy a Home
While it’s true that you will likely need to put some money down, a 20% down payment is not standard. In fact, some loan types, such as VHA or USDA, may require a low or no down payment.
Before writing off your chances to buy a home, talk to your loan officer about your loan options and determine how much you will need to put down for each loan type.
Myth #4: The Down Payment Is Your Only Up-Front Cost when Buying a Home
For some buyers, a down payment represents the biggest up-front cost when buying a home, but it isn’t the only expense you’ll be asked to fund. For instance, closing costs are typically 2.5% of the home loan amount and are generally due at signing.
You may also be required to prepay property taxes and insurance or demonstrate that you have reserves. Reserves is the amount of money you have in savings after closing, which provide a safety net in the event of unexpected expenses, and some lenders/loan types require reserves.
Just because you find an apartment with a lower rent than your anticipated monthly mortgage payment doesn’t necessarily mean that renting is favorable to owning a home. It's essential to consider the long-term upside. Mortgage payments work toward the eventual ownership of an asset that often appreciates in value over time. This allows you to build equity in your investment.
Also, homeowners with a fixed-rate mortgage can benefit from stable payments for the life of their loan, while renters are typically subject to rent increases over time. Buyers may also be eligible for mortgage interest deductions, offering potential tax advantages.
Myth #6: Go with the Lowest Interest Rate when Looking for a Mortgage
There are many factors to consider when shopping for a mortgage, and the interest rate of the loan is just one. For example, a lower-interest rate may come with high origination fees or points that must be paid, which can increase the cost of your mortgage.
Additionally, a mortgage with a low interest rate may have stricter terms and conditions that could limit your flexibility. It's also important to consider the length of the mortgage term, as the longer you pay on your mortgage, the more interest you pay over time, even if the rate is lower.
Myth #7: A Loan Prequalification Is a Guarantee
Before you begin shopping for your home, it’s important to know how much you can afford. Asking your lender to provide a prequalification letter gives you a guide as to your eligible purchasing price, but that number isn’t written in stone. Since a prequalification is based on information you provide, and not a thorough review of your credit, your numbers could change as information is discovered when your loan goes into underwriting.
It's also important to know about the “quiet period,” the time between being approved for a mortgage and closing. Any financial decisions you make during this time could alter your borrower status and even make you ineligible for the loan.
This often happens when borrowers seek credit to make a new purchase for their home or decide to buy a new car now that their mortgage is approved. Keep in mind that your bank will be alerted to new credit activity and may need to adjust the terms of your mortgage in response.
Myth #8: It's Going to Be at Least a Year Before I Can Buy a Home
There are many reasons a potential buyer might think that homebuying requires a long runway. In the case of subpar credit, it’s important to know that credit scores can be turned around in 3-6 months if you take the proper actions.
Other homebuyers may worry about having enough to put down or to fund other upfront costs. In both cases, having a frank discussion with your loan officer will give you a realistic view of your position. He or she will consider where and when you plan to buy, how much of a monthly payment you can afford, and help you with a plan to expedite the path to homeownership.
Knowing the Truth Behind Mortgage Misconceptions
By understanding the truth behind these mortgage myths, you can confidently navigate the homebuying process and make informed decisions about your financial future. With proper guidance, you can achieve your goal of owning a home and building long-term wealth for you and your family.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.