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Mortgage Loans: Exploring Myths vs Reality

Mortgage Loans: Exploring Myths vs Reality

 

Purchasing a home can be one of the most exciting, while being equally one of the most stressful times of your life. The housing market has been on fire in recent years, so when you see a house that you’d like to explore buying, you’ve got to be prepared. To help provide some clarity, we want to provide some insight on some of the most common mortgage myths that consumers may question.

 

Myth #1 | You need 20% for a down payment.

Years ago, it was typical for lenders to require a 20% down payment. In today’s world, however, things look a bit different. Although 20% down will often get you the best rate, payment, and lowest closing costs, there are mortgage loan options that make owning a home possible while requiring less of a down payment. For instance, FHA allows 3.5% down, eligible Veterans may qualify for a 0% down VA loan and there may be other programs that you qualify for. It really all depends on a number of factors that go into the mortgage loan process. There are also down payment assistance programs from various nonprofit and governmental agencies that you may qualify for if you are a first-time homebuyer. Talking to your lender to determine what amount of down payment you’ll need is the best path to take before deciding.

 

Myth #2 | Buying is cheaper than renting.

Buying vs. renting really depends on the person. When buying a home, you must be prepared for ongoing maintenance, repairs and any unexpected problems. So, although your mortgage payment may be cheaper per month there are many other expenses to consider before going all-in.

 

Myth #3 | You need perfect credit to buy a house.

You don’t actually have to have an A+ (800 and above) credit score to buy a home. Even with a credit score with a blemish, or some debt you may still be able to qualify for a mortgage loan. Generally, mortgage lenders look for a credit score of at least 620, but there are some instances where a lender may be able to approve a score a bit lower. It’ll be important to speak with a mortgage loan officer from the lender you want to finance to understand the specific requirements.

There are always other options if you don’t have the best credit score such as having a co-signer or making a larger down payment. Many confuse this myth because when you do have good or perfect credit you likely would have a lower interest rate which saves you money in the long run. It’s good to keep in mind that a steady income, paying your bills on time, and saving for a down payment is one of your best plans when preparing for homeownership.

 

Myth #4 | Credit score does not matter if you have a large down payment.

No matter the size of your down payment, your credit score is still an important factor when buying a home. What a credit score will impact is the requirements when it comes to the down payment and the interest rate you will receive for your mortgage. The higher the score, the better for your loan. It will likely require less of a down payment and/or give you a lower interest rate, but the trio of credit, down payment, and interest rate are not mutually exclusive. They are all evaluated as individual pieces in the puzzle that makes up the entire mortgage.

 

Myth #5 | You can't be in debt and buy a home.

Having too much debt may impact your ability to buy a home, however, in a realistic world, most people are carrying debt such as student loans, car payments, and credit card balances. What lenders do look at when qualifying you for a mortgage is how much debt you're carrying compared to your total income, called your “debt-to-income ratio” (total monthly debts expressed as a percentage of gross monthly income). Typically to be approved for a mortgage, that ratio needs to be under 43%. If your debt is too high, you may need to consider paying down or paying off some of that debt before buying a home or figure out a way to generate additional income.

 

Myth #6 | Find a home first, then worry about financing.

A very agonizing lesson that many first-time buyers experience is falling in love with a home only to then learn they can’t afford it or are denied a mortgage loan. That’s why it’s important that you do your research and speak with a lender before you embark on your home search.

 

Myth #7 | Getting prequalified is the same as getting pre-approved.

Many home shoppers get these two terms tangled, and they truly mean a world of difference. A pre-qualification is an initial evaluation of your potential to qualify for a mortgage loan. Oftentimes, potential lenders will send you a pre-qualification in the mail or email. This simply means that you match the basic criteria that the lender is evaluating in prospective homebuyers. You will still need to go through the entire mortgage process as if you never received a pre-qualification.

Alternatively, a pre-approval is a much more thorough process in which your financials would be reviewed by your lender in order to make an approval or denial for a mortgage loan. If approved, this is when you know how much you can afford based on what your lender is willing to give you in a loan. Sellers look for pre-approvals over pre-qualifications.

It's also important to know that once you are pre-approved, there is still much work to be done to get from the pre-approval to completing a mortgage and close on the home. This is all vital information that you will review with your mortgage loan officer when going through the initial pre-approval process.

 

Myth #8 | It’s always best to get a 30-year fixed-rate mortgage.

Although a 30-year fixed mortgage is a popular option, it’s not the only mortgage option. Each home-buyer is unique, and talking with your lender will help you determine the best loan options for you. You’ll need to consider financial readiness, how long you plan on owning the home, monthly payments based on different terms, and overall affordability among other factors.

 

Myth #9 | My credit score is good enough for another lender so it’s ok for CSE.

Credit score requirements vary from one lender to the next. If you have a lower credit score you may get hit with heavy fees or high-interest rates and it may be in your best interest to wait until you improve your credit score to buy a home.

 

Myth #10 | I have poor credit but have a co-signer with great credit, so my credit doesn’t matter.

A Co-Signer with great credit does not overcome your low credit score or credit problems when dealing with a mortgage. Remember, mortgage loans are very different than a personal loan or auto loan. Rather than looking to a co-signer who may not be living with you in your new home, consider looking at alternative options such as a homebuyer assistance program.

 

There are likely some other questions you may have in today’s world of mortgage lending. If so, we encourage you to reach out to a CSE Mortgage Loan expert! They will be able to answer questions, provide you options and explore with you whether you’re ready for homeownership or not.

SOURCES:

  1. FORBES: https://www.forbes.com/sites/taramastroeni/2018/11/27/6-common-mortgage-myths-debunked/?sh=7854db5e49e0

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