Undoubtedly, purchasing your first home can feel intimidating. While daydreaming about your ideal home and how you can customize it is enjoyable, first-time home buyers may be surprised by the sheer number of steps necessary to turn that dream into reality.
One of the biggest steps is getting a mortgage for the first time, which can be very confusing. Many common mortgage myths and misconceptions can be found by conducting a quick online search, yielding a wealth of information. How do you tell fact from fiction, then? Continue reading to learn the facts about mortgage loans and what you should be aware of.
Myth 1: A 20% down payment is required to buy a house.
Is a 20% down payment required when buying a home, even though many financial experts advise against it? No, is the answer. That magic percentage of 20% is not necessary. While some government-backed loans don’t require any down payment at all, some conventional loans will accept as little as 3%.
PMI, or private mortgage insurance, is the only reason why the 20% recommendation exists. If you decide to put less money down, mortgage lenders will typically add PMI as an extra. If you were to fall behind on your payments, it would give your lender a sense of security. Although some may demand a one-time upfront premium paid at closing, you’ll typically see it added to your monthly mortgage payment amount.
While it’s prudent to ensure that you have enough money to purchase a home, if you’re willing to pay PMI, you don’t need to become fixated on the 20% down payment requirement.
Myth No. 2: You must have excellent credit to be approved for a mortgage.
Increasing your credit score is a common checklist item before purchasing a home. But is it really necessary for it to be spotless and ideal? Nope! This is yet another prevalent myth about mortgages.
You also don’t want to have bad credit, though. The minimum requirement will vary depending on the type of loan you take out and who insures the loan, but most mortgage lenders will have one. For instance, an FHA loan may only look for a credit score of 500, while a conventional loan may demand a score of 620 or higher. The latter is a special choice for borrowers who are seen as higher risk due to poor credit and a lack of funds for a down payment. However, keep in mind that there might be additional requirements to fulfill in addition to the requirement for PMI, which we discussed in the previous section.
Myth #3: Having debt will make it impossible for you to get a good mortgage.
Another prevalent mortgage myth is that you should pay off all of your credit cards, student loans, and other debts before buying your first home because debt and your credit score frequently go hand in hand. Unfortunately, this is only sometimes a practical option for home buyers because paying off student loans can take years, which is much longer than you want to wait to become a homeowner. Student loan debt is now very common, especially among millennials. The good news is that having debt will ensure you get a good mortgage rate.
Your debt-to-income ratio, or DTI, is what really matters. Simply put, what percentage of your monthly income is spent on debt and ongoing costs? Your lender evaluates your risk using that percentage figure. Even if the debt is included in your monthly expenses, you are typically considered a candidate with a DTI of less than 50%.
It doesn’t necessarily mean you’re out of the running, even though a lender might give a less-risky buyer a better mortgage rate. This is why it’s crucial to compare mortgage loan offers. For instance, working with a mortgage broker rather than a bank gives you access to a wide range of lenders, enabling you to find the best one for your particular needs.
Myth #4: Obtaining a mortgage will harm your credit.
When it comes to mortgages, your credit score is a very hot topic. It is no surprise because that particular number follows you around for the rest of your life, either to your advantage or disadvantage.
But when it comes to the procedure for purchasing a home, we also need to dispel another widespread mortgage myth. Even though we always advise requesting pre-qualification before attending your first open house, some people are concerned that doing so will harm their credit score. This is especially true if you are shopping around, as we suggested above. You’re safe; that’s the good news.
Recent credit inquiries account for 10% of your FICO score. Although requesting a pre-approval will temporarily lower your score, you won’t even be aware of the impact until after you’ve finished your full pre-approval, which is typically done once you’re prepared to make an offer.
Myth #5: If you work for yourself, getting a loan is practically impossible.
Now let’s return to your DTI ratio. What happens if your income needs to be more consistent from month to month? This is happening more frequently these days because so many people are utilizing the gig economy.
The short version is that getting a mortgage if you work for yourself is a little different, but it’s still possible. In the end, the lender is still considering your income compared to your expenses. Without a W2, they will typically request additional forms of documentation to determine this, such as:
- The most recent two tax years’ income tax returns
- Returns of business income if you are a corporation or partnership.
- Income and expense reports
- Your business license on paper.
The mortgage myths we listed above, such as needing a strong credit score and a 20% down payment, may apply more to you because you may be considered a slightly more risky loan candidate. Once more, researching and working with a reputable mortgage broker can help you find the best lender for your needs.
Myth #6: You’re locked in once you have a mortgage loan.
You’ve now obtained a mortgage loan and may have been a homeowner for a while. Congrats! But what if your financial circumstances change? You might be looking for ways to reduce your monthly expenses because you lost your job. You can also pay off your loan early if you’ve advanced in your career.
You’re typically never “locked in” to your mortgage so you may have access to both of these options.
Refinancing is a popular choice right now because interest rates are so low; it can lower your monthly payments OR give you extra money to play with if you choose a cash-out to refinance.
Check your paperwork before making any early repayment plans; some lenders include “prepayment penalties” in terms of your loan, so be sure you are aware of all conditions and guidelines.
Discover How Midgate Mortgage Can Help.
We hope that dispelling the six mortgage myths listed above has given you more self-assurance and control over the home-buying process. We can also assist you when you’re ready to move forward with a pre-qualification or pre-approval.
We’ve made it simpler than ever to get in touch with a mortgage broker so you can concentrate on what really matters: finding your ideal home. To begin, get in touch with us today by calling 310-791-0854!