8 Common Myths About Getting a Home Loan
This article is a collaborative effort submitted by our 3Rivers Mortgage Team.
There’s a lot to know about the process of getting a home loan, and several sources you can gather your information from. In some cases, you may have heard something regarding buying a home that hindered your progress or desire to move ahead with getting a mortgage. It’s always a good idea to go to a trustworthy source, like your trusted financial institution, to get some further clarity on whether or not what you’ve heard is totally true.
Here are 8 common mortgage myths we hear frequently at 3Rivers and more information about each!
Myth #1: You need a 20% down payment to buy a home or property.
The gold standard of mortgage lending used to require a down payment of 20% of the purchase price. However, if you don’t have the cash to put 20% down, there are plenty of other ways to put down less and still purchase a home! One option to consider is a Federal Housing Administration (FHA) loan which lets borrowers put down as little as 3.5%. With this type of loan, borrowers must meet certain qualifications, including a minimum credit score of 580 and steady employment for at least two years.
Alternatively, if you’re active or retired military (or a surviving spouse of a veteran), a Veteran Affairs loan (VA) allows you to buy a home with 0% down.
And those aren’t the only workarounds; some counties and states offer loan programs that enable borrowers with low income to receive a down payment subsidy.
Myth #2: A 30-year fixed-rate loan is the best loan option.
While the 30-year loan with a fixed interest rate may be the first loan most homebuyers think of getting, there’s no one-size-fits-all loan option. For example, although adjustable-rate mortgages (ARMs) have a bad rap, ARMs do make sense in certain circumstances. For example, if you plan to move soon, before the rates adjust, or if you can’t afford a home with a fixed-rate mortgage, since those interest rates are slightly higher.
Meanwhile, a 15-year loan might make more sense than one for 30 years if you have enough cash to cover the bigger monthly bills. Your monthly payments will be larger, however, the overall interest paid over the life of the loan is significantly less. Each homebuyer’s situation is different.
Myth #3: Everyone needs private mortgage insurance.
If you’re using conventional, non-government financing and can’t afford to make a 20% down payment, you’ll have to pay Private Mortgage Insurance (PMI). PMI kicks in if you end up unable to pay your mortgage. Since your lender loses money in this scenario, PMI pays it benefits to offset that loss. You can expect to pay about 0.3% to 1.15% of your home loan in PMI. This can be a sizable sum, but it may make sense if you want to buy a home now instead of waiting until you can save for a bigger down payment. Additionally, PMI will drop off on conventional loans once you have 20% equity in your property.
Myth #4: There is no difference between being prequalified and preapproved.
Think of prequalification as an initial step and preapproval as the green light signaling that you’re ready to start your home search.
A quick conversation with your lender about your income, assets, and down payment is all it takes to get prequalified. But if you want to get preapproved, your lender will need to verify your financial information and submit your loan for preliminary underwriting.
A preapproval takes a little more time and documentation, but it also carries a lot more weight. When sellers review your offer, a preapproval means you’re a serious buyer whose lender has already started the loan process, so things can move along more quickly.
Myth #5: First-time homebuyers should opt for a Federal Housing Administration (FHA) loan.
If you’re buying your first home, many people think an FHA loan is the only option to get financing. An FHA loan requires 3.5% down with both upfront and monthly mortgage insurance. However, with good credit, first-time buyers can get a conventional loan with only 3% down and monthly mortgage insurance. Mortgage insurance payments will drop off on conventional loans once you’ve reached 20% equity in your property, unlike an FHA loan that you would need to refinance to eliminate.
Unless credit is rough, first-time buyers should always look at a conventional loan first.
Myth #6: A couple cannot own a home together unless they are married.
It’s surprising how many times we hear couples say, “we aren’t married, so we can’t own a home together.” Anyone can make a joint application for a mortgage loan, regardless of marital status!
The credit and income for each borrower will be considered for the loan. Something to consider when applying jointly is how to take the title, either as joint tenants with rights of survivorship or tenants in common. You may want to seek legal advice in order to determine the best option for you and your significant other.
Myth #7: A home may be purchased with 0% down while rolling in closing costs and repairs to the home being purchased.
A home buyer is able to purchase a home with 0% down using a Veterans Affairs (VA) loan or a USDA loan. However, closing costs and repairs may not be rolled into the purchase.
At the closing, you’ll sit down with the professionals involved in your real estate transaction and sign all the legal documents needed to give you ownership of your new home. At that time, you’ll also be responsible for paying closing costs as part of the closing process.
Closing costs are typically 3–4% of your home’s purchase price. Before closing, you’ll receive a Closing Disclosure (CD) three days prior to closing to let you know exactly what you can expect.
If you have questions about the closing process or what you are responsible to bring to closing, talk to your lender ahead of time.
Myth #8: You need a credit score of 720 or higher to qualify for a mortgage.
A borrower may qualify for a conventional mortgage with a score as low as 620, provided they have supporting application strengths. Though a credit score is an important factor in lending (learn more here), there are other determining factors that are taken into consideration, including capacity, collateral, and capital.
- Capacity: Tells the story of the borrower’s ability to pay the mortgage back. Does the borrower have a job, and have they had a reliable source of income for a significant amount of time? Is there other outstanding debt to consider?
- Collateral: If the loan is failed to be repaid, is there something of value that could be agreed to be given to make up for payment? Collateral is an asset or property pledged to the lender until the loan is repaid. It may be thought of as a type of deposit that helps get your loan approved and something that can be used as the loan is being paid off. It protects the borrower from defaulting on the loan.
- Capital: What is the borrower’s overall worth? Where did this money come from? Are there additional assets, such as a savings account, property equity, personal assets, stock, or certificates that could be used to repay the debt
We hope this clears up some of the misconceptions you may have had about getting a home loan! Our Mortgage Team is always happy to answer any questions you have, through every step of your home-buying and homeownership journey.
First-time homebuyer? Get even more information about what to expect during the home-buying process in our First-Time Homebuyer Guide.
Ready to start the process of buying a home? Get in touch with our Mortgage Team today!