Don’t let the mortgage process spook you! Avoid these mortgage myths so you can make the best decision possible when house hunting!
If you are in the market for a new home, you’ve likely come across countless articles on the subject and received solicited and non-solicited advice and anecdotes from friends and family about their own encounters. But what is true and what is not true in the bulk of information available? In this article, we aim to help you debunk some of the most common mortgage myths.
It’s ok to start looking for homes before you apply for a mortgage
With so many resources, websites, and apps available to search for homes on the market, it’s easy to get caught up in looking for the perfect home before talking to a mortgage professional. However, it’s very important to set a realistic budget for yourself and to get pre-approved with a lender to make sure that you qualify for that budget. Securing financing before putting in an offer on your dream home shows you are serious about purchasing the home, makes your offer stronger, and can help you avoid the disappointment of a rejected offer.
You need good credit to buy a home, so don’t bother looking if you have bad credit
Your credit score is directly tied to the interest rate you qualify for, so the higher the score, the lower the interest rate. Lenders prefer higher credit scores because it’s an indication that the borrower pays their debt obligations on time, and they are not likely to default. However, that doesn’t mean you can’t get a mortgage with less than perfect credit. If you have a steady income and can demonstrate a history of paying your bills on time, you will likely qualify for a mortgage. It’s been reported that the average American’s credit score is 650, which is considered “fair,” and Experian estimates that only 16% have “very poor” scores of 579 or lower. While conventional loans require a credit score of 620 or higher, there are programs and lenders that will extend a mortgage to borrowers with a score as low as 500. If you’re thinking about buying a home, get a copy of your free credit report first – by Federal law you can get a free copy every 12 months from each agency or from annualcreditreport.com. This will give you a chance to correct anything that is not accurate and will give you an idea of what you can do to improve your score before applying for the mortgage loan.
You need at least 20% down to buy a home
Having at least 20% of the home’s purchase price to put down as a down payment when buying your home has it’s advantages, including the elimination of private mortgage insurance (PMI) and qualifying for better interest rates. But that doesn’t mean you can’t get a home with less than 20% down either. If you have a higher credit score and qualify for a conventional loans, there are some programs that require as little as 3% down. For qualified borrowers with less than perfect credit, there are government backed programs such as VA, FHA and USDA loans that have low to no down payment requirements. With these programs, you can get into a home with putting 3.5% down or even no money down at all, if you are qualified. Many lenders also allow the down payment to be gifted to you, provided the sources of the funds can be documented. These funds can come from family, friends or even grants from down payment assistance programs. You can research these types of programs at downpaymentresource.com.
You should automatically get a 30-year fixed mortgage
While a 30-year fixed mortgage is probably the most popular home loan product, that doesn’t mean it’s one size fits all. Each borrower has different needs and goals, so consider your long-term goals and how long you want to be in the home before making a decision. If it’s your forever home, a 30-year fixed will give you a stable, fixed, monthly payment that will be paid off completely at the end of the 30-year term. If you are planning on staying short-term, you may consider a shorter term mortgage (if your budget allows for a higher payment) or an adjustable rate mortgage (ARM). ARMs are very different than they once were, they feature a fixed period of 1-10 years before the adjustable period begins, and have caps on the amount they can adjust. If you plan on moving in the next few years, you may be able to save money by opting for an ARM. If you have been in your home for a long time and have built up equity, you can likely pay off your home faster and save on interest by refinancing to a shorter term.
Pre-Qualified and Pre-Approved are one in the same
Although the terms may seem the same, there is a huge difference in the two terms. Pre-Qualified borrowers have spoken with a lender and given verbal or written information about their financial situation, but it has not been verified or documented. Therefore, the pre-qualification is only an opinion of what may be your ability to purchase a home based on what you told your mortgage broker/lender. A pre-approval is issued after your credit score, income, employment, and assets have been documented and verified, and the lender has produced a letter based on that factual data. This information will lead you in the right direction to a find a home with a payment in your preferred budget, and once you find a home you like, make your offer much more solid.
Your pre-approval is a guarantee you’ll get the loan
A pre-approval is an offer made by a lender to extend you a loan based on the current information you provided. If anything changes from that point up until closing, it can throw things off and you risk losing the loan. For example, if you lose your job, take out a car loan, or spend all the down payment money, the lender will likely not give you the loan that you previously qualified for. These types of things can alter your credit score, income, and financial situation, which is checked (sometimes multiple times) throughout the underwriting process. As long as everything stays relatively the same, you should be in the clear – but talk to your loan officer before making any changes that might affect your finances or credit.
The down payment is your only out of pocket cost
Most borrowers focus so much on the down payment that they may not even realize there are some other out of pocket costs – such as closing costs, appraisal, home inspection and moving costs – to take into consideration when buying a home. It’s possible to negotiate some or all of the closing costs to be paid by the seller, but that doesn’t guarantee you won’t have to bring some money to the closing table. Plus, you’ll want to make sure you have some cash set aside for anything that could happen post-closing. Don’t forget – you have to pack up everything you own and move it into a new place! You will need boxes, tape, bubble wrap and other supplies to pack it up, plus the expenses associated with getting it there as well. Once you get everything moved in, there may be unexpected costs, emergencies, or small projects you’ll want to fix – like a leaky faucet, a new toilet seat, or painting a room – that you will want to have some money set aside for.
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South County Mortgage is a licensed mortgage brokerage providing better than bank service and better than bank rates to Rhode Island residents for over 20 years. Visit our website for more info, www.scmtg.net.