Mortgages can be complicated and confusing, so it’s not surprising that there are a lot of misconceptions surrounding them.
Because buying a home is a great way to build equity and help secure your financial future, knowing what’s real and what’s a fallacy is essential to ensuring you get the most out of your mortgage.
Myth #1: It’s OK to find your dream home first, then apply for a loan.
Fact: Before you start looking at homes online or attending open houses, it’s important to get preapproved for a loan from your lender. This will help you determine how much you can afford and avoid being disappointed if you fall in love with a home you don’t qualify for. Most real estate agents will also require a preapproval letter before assisting you in your homebuying journey.
Myth #2: Prequalification is the same as preapproval.
Fact: Both offer estimates of what you can afford, but the accuracy of those estimates varies for each. With a prequalification, the lender reviews mostly self-reported financial information, while for a preapproval, they examine your credit report, bank statements, and debt-to-income (DTI) ratio. Note that some lenders may use these terms interchangeably, so ask which one is being provided, as most sellers will only consider buyers with preapprovals rather than prequalifications. However, neither one guarantees final approval.
Myth #3: You should buy a home for the maximum amount you’re eligible for.
Fact: When considering a home, you shouldn’t overextend yourself. Even though you may be approved for a loan at your limit, homeownership often comes with added or unexpected costs, such as repairs, homeowners association fees and assessments, and higher taxes, which you’ll want to account for so you don’t get into a financial bind.
Myth #4: You need a high credit score to qualify for a mortgage.
Fact: While having a decent credit score can help you get approved for a loan (conventional loans usually require a minimum score of 620), you can still obtain a loan with a lower one. For instance, with a Federal Housing Administration (FHA) loan, a credit score of 580 will likely get approval. Keep in mind that there are several other important factors your lender considers when approving you for a loan, such as your income, DTI, and employment history.
Myth #5: You must put down 20 percent to buy a home.
Fact: Although a 20 percent down payment will help lower your mortgage payment, it’s not a requirement. There are several programs with lower down payment options if you’re financially strapped. For example, you can put down as little as 3.5 percent with an FHA loan, and a VA-backed loan requires no money down. Even conventional loans have some low-down-payment programs. Your lender will be able to outline the various options and your eligibility for each.
Myth #6: Your down payment is applied to your closing costs.
Fact: Since your down payment is a percentage of your new home’s purchase price, it only goes toward the cost of the home. Your closing costs, such as processing and mortgage fees, escrowed taxes and insurance, title insurance, and appraisal, must be paid separately.
Myth #7: It’s always best to get a thirty-year mortgage.
Fact: Generally, the most popular loan choice for borrowers is a thirty-year fixed-rate mortgage, as the longer loan term enables them to get a lower monthly payment. However, this type of loan also comes with a higher interest rate, delays building equity, and puts you at risk of overborrowing. Other options, such as shorter-term mortgages with lower interest rates, have fewer fees and can help you build equity quicker. Although the monthly payments will be higher, you can potentially save more in the long run.
Myth #8: FHA loans are only for people with little to no money or poor credit.
Fact: First-time homebuyers often apply for FHA loans because of the lower down payment requirement and interest rates. Lenders may also be more lenient on the credit score requirement for borrowers just starting to build their credit history and learning how to manage their debt.
Myth #9: You should only get a fixed-rate loan.
Fact: Depending on the circumstances, such as the current interest rates available and the length of time you plan to stay in your home, an adjustable-rate mortgage may be a better choice than a fixed-rate one. It has the potential to offer a lower interest rate, which will reduce your monthly payment, and a cap on how high the rate can go so you won’t experience extreme fluctuations.
Myth #10: You can’t get a loan if you’ve declared bankruptcy.
Fact: If you’ve declared bankruptcy in the past, you can still get a mortgage; you’ll just have to wait a certain number of years (typically four years for a conventional loan) after the bankruptcy has been discharged or dismissed to apply for one. Consult potential lenders to find out what measures you can take to be eligible for future financing.
Getting a mortgage may seem like an intimidating and complex process, but it doesn’t have to be. Working with an experienced real estate agent and a knowledgeable lending officer can help you sort fact from fiction to better ensure the process goes smoothly.