Buying a home can be stressful, especially when overwhelmed with conflicting information online.
In this blog post, we debunk 7 common mortgage myths that surround the homebuying and mortgage financing process.
Myth 1: In order to purchase a home and get the best rate, I need to put down 20%.
Loan products such as VA and USDA offer 100% financing. FHA allows for as little as 3.5% down, and Fannie Mae & Freddie Mac back Conventional loan products with as little as 3% down.
In order to avoid monthly private mortgage insurance (PMI) on a Conventional loan, a 20% down payment is required; however, to qualify for a Conventional loan or purchase a home, 20% down payment is not necessary.
Myth 2: My friend just closed last week with an interest rate of 2.5%. Don’t I get the same rate?
No two files are created equal. A ton of factors contribute to rate: credit score, down payment, loan size, length of rate lock, points paid at closing etc. In addition to all of the variables, the market changes daily, hourly -- heck -- even with every minute, the market is subject to change, and in turn, affecting the interest rate.
Myth 3: The bank or lender with the lowest interest rate is the best.
There’s no such thing as a free lunch. Even the lowest interest rate comes at a cost in either service or financing. Some banks and lenders will wrap origination, processing, underwriting and application fees, in addition to points into the closing costs to offset the interest rate. Whether you choose to pay more fees at closing, or opt for a slightly higher interest rate, make sure you compare scenarios apples to apples!
Talk to one of our loan officers to find out which program makes the most sense for you!
Myth 4: I can’t buy a home because I have student loans.
While having student loans, and any debt for that matter, will affect a borrower’s debt to income ratio (DTI), having debt will not prevent a person from qualifying to purchase a home. Student loans must be paid on time. For loans that are in income-based repayment plans, we may have to use 1% of the balance as monthly payment to qualify.
Myth 5: My down payment covers my closing costs.
Down payment is a percentage of your home’s sales price that you pay up front when you purchase a home. Closing costs are independent from your down payment and can range from 3% to 6% of your loan amount. Closing costs include third party fees such as title insurance, attorney, and appraisal inspection, as well as government taxes, escrow, and origination fees.
Myth 6: Renting is cheaper than buying a home.
Your monthly rent pays for your landlord’s mortgage; whereas when you’re the homeowner, you’re paying your own mortgage. Your monthly payment translates to equity in your home. With each passing year, you’re getting a return on your investment, instead of throwing your money away with nothing to show for it.
While you may have to front more money upfront to purchase a home, with a fixed-rate mortgage, your monthly principal and interest payments remain unchanged throughout the life of your loan. Rent prices have the potential to rise every year, and a security deposit that isn’t guaranteed money back with the switch of each rental.
Myth 7: I need perfect credit to buy a home.
Your credit may not be spotless, but that doesn't mean you can't buy a home. While conventional loans require a score of at least 620, loans backed by the Federal Housing Administration (FHA) only require a score of 580 for approval. To strengthen your file, there are other options beyond a perfect credit score like adding a co-borrower or making a larger down payment that can help you qualify for a loan.
Interest rate is affected and determined by your credit score. It is best practice to make sure your credit is in the best possible shape before you look to purchase a home, so that you aren’t paying more money in interest rate as a result of the lower credit score. You can raise your score by making sure to make your payments on time every month and maintaining a high amount of revolving availability.
For any additional questions or clarity regarding any of your own mortgage misconceptions, reach out to one of our loan officers to learn more.