There are many mortgage myths that buyers, particularly first-time buyers, have when they’re applying for a loan. This process may feel daunting, but don’t allow false information stop you from pursuing your dream of home ownership.
Whether you’re looking to buy now or in the future, be sure to keep these mortgage myths in mind.
1. Pre-Qualified Means You’re Pre-Approved
There’s a difference between pre-qualifying for a loan and getting pre-approved. Pre-qualifying for a loan will give you a general idea of your budget based on your self-declared assets and debt. Pre-approval goes a step further and allows lenders to pull your credit and look at your financial history in order to commit to loaning a certain amount.
Your best bet to competing in this real estate market? Going a step further and getting an underwritten credit approval. This means your file is underwritten with a TBD (to be determined) address. Not all companies have this option, so be sure to ask!
2. You Need A 20% Down Payment
This may well be one of the mortgage myths we hear the most. A large down payment has its benefits, but it’s not required. With as little as 5% down, borrowers can secure a conforming, conventional mortgage. In fact, many homebuyers only put 5-10% down on their loan.
Having a down payment of less than 20% means you’ll have to pay for private mortgage insurance (PMI) or government backed insurance if you have an FHA loan. Keep in mind that many state and local housing authorities and community agencies offer down-payment assistance for eligible homebuyers.
3. You Need Perfect Credit to Get a Loan
While higher credit scores are sure to help you qualify for a loan and a lower interest rate, they’re not essential. Lenders also look at your collateral, capital and capacity to pay back the loan when deciding whether to loan you the money for a home.
FHA loan requirements are far lower than for conventional loans. According to HUD, borrowers may qualify for an FHA loan with a minimum score of 580 and a down payment of 3.5% . If your score is lower than this, you may need to have a 10% down payment to qualify for a loan.
4. You Can’t Have Any Debt To Qualify
When you apply for a mortgage, the lender wants to know you’ll be able to pay their money back. As long as you show you’re responsible by making payments on time, having a few credit cards, student loans or a car loan may actually help rather than hurt you.
However, if the amount of debt you have exceeds a certain percentage, it may impact whether or not you’ll qualify.
5. Your Income Determines How Much You Can Borrow
While your income plays a role, it is not the sole determiner. Your debt-to-income ratio (DTI), which factors how much debt you have in relation to your income, is much more important. As long as it is at a reasonable level, you may qualify for a variety of loans.
6. Lenders Only Consider One Of Your Credit Scores
When your lender pulls your credit, it pulls your scores from all three credit bureaus and uses the median or middle score. If you have a co-borrower, they will use the lowest credit score between the two of you.
7. It Takes 7 Years After A Foreclosure to Get A Mortgage
If you underwent a short sale or foreclosure doing the housing recovery, you may still purchase a home within 2-4 years of a short sale and 3-7 years of a foreclosure. If you’re planning to apply for a mortgage in the future, start to improve your credit right away so you’re in a position to apply for a loan when you’re ready to buy.
8. You’re Pre-Qualification Rate Is The One You’ll Get
Rates change daily – sometimes hourly – and are connected to the daily trading of mortgage bonds, which means the rate you’re quoted may increase of decrease throughout the day.
9. Your Interest Rate Reflects Your Loan’s True Cost
Your annual percentage rate (APR) represents the true cost of your mortgage and includes the whole gamut of costs, including your interest rates, points, mortgage insurance and fess. Since it includes all of these figures, it will be higher than your interest rate. When comparing lenders, focus on the APR to analyze the true cost of your loan – don’t get too caught up with the front-facing interest rate attached to the loan.
10. PMI Adds Hundreds To Your Monthly Payment
The amount of PMI (Private Mortgage Insurance) you pay monthly varies based on your credit score and your loan-to-value ratio (the amount you owe on your mortgage compared to its value). The average amount ranges between $40 to $80 per month for every $100,000 borrowed.
Your PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home. You can also request that your lender cancel your PMI sooner if you have made additional payments or if rising home values have increased your home equity to more than 20%. Your request must be in writing and meet these additional criteria.
Mortgage Myths Avoided!
Applying for a mortgage doesn’t have to be hard. Arming yourself with accurate information can make the process easier and allow you to look forward to the end result – your new home!