Buying a home is a huge investment, making education essential. Here are several common myths surrounding buying and financing a home.
Image courtesy of digitalart at FreeDigitalPhotos.net
Myth #1: I should look at houses before getting a pre-approval.
Looking for a home without a pre-approval can be compared to going shopping without your wallet. The first step in homebuying should always be meeting with a mortgage banker.
To get a pre-approval, you lender will run your credit score and compile a loan application based on the information you provide regarding income, employment history, assets, etc. Your lender will analyze this information and issue a decision on loan eligibility.
To present the best offer on a property, have peace of mind in regards to home financing and gain the ability to act quickly on a home purchase, consider taking pre-approval a step further with a loan commitment.
Myth #2: I need a perfect credit score to qualify.
Credit scores are a huge part of the loan approval process, because your credit score is used to determine how risky of a borrower you are. Two-thirds of Americans believe they need a very good credit score (780+) to qualify for a mortgage, according to a Wells Fargo survey.
In the mortgage world, a score over 780 is considered "excellent" or "top tier" and will likely get you a lower interest rate but credit score requirements are dictated by the loan type you are eligible to use. For instance, a minimum score of 620 is required by all mortgage loans delivered to Fannie Mae. Currently, though, Compass Mortgage has the ability to finance FHA loans with credit scores as low as 580.
Myth #3: I need to have a 20% down payment.
A whopping 36% of consumers still believe that a 20% down payment is required to purchase a home. While a 20% down payment used to be the status quo, there are several options for homebuyers to put down little to no money on their home purchase.
Low down payment options include: VA and USDA Rural Development Loans, FHA, conventional, and IHDA's FirstHomeIllinois. Some of these programs even allow down payment funds to come from a family member or a grant from a state or local government down payment assistance program.
Myth #4: There are only a few types of mortgages available.
A Wells Fargo survey found that consumers' awareness of different types of mortgages has decreased from 2014. Those surveyed were asked to select all the types of mortgages they had heard of and almost all the mortgage types listed were recognized by fewer consumers.
Mortgages are available for several types of home purchases from construction and home rehabilitation loans to jumbo and state-specific home loan programs.
Myth #5: The only upfront cost is a down payment.
When you close on your home purchase, your down payment is not the only cost. On top of down payment, closing costs typically range from 2 to 5 percent of your home's purchase price. These costs are charged by your lender and other third parties related to your home purchase for services such as loan origination, appraisal, inspection, title search, recording, etc.
Under the new TRID disclosure laws, borrowers will receive a loan estimate disclosure after application which will include an estimated cash-to-close breakdown. If closing costs are a burden for you as a homebuyer, you can discuss a lender credit, which rolls some or all closing costs into your mortgage loan, with your mortgage banker.
Myth #6: A good home inspection means no repair costs.
A home inspection gives homebuyers an idea of a home's condition, possibly indicating future repairs and safety issues. A home inspector looks for defects or malfunctions in a home's structure, major systems, and physical components. But just because your home inspection came back clean, doesn't mean you shouldn't plan to set aside funds for maintenance costs.
Myth #7: Online real estate search sites are 100% accurate.
Ninety percent of homebuyers look online for potential homes at some point during the buying process. In today's competitive housing market, accuracy of home search sites is extremely important, which is why Compass provides clients with free access to a password-protected MLS site.
MLS sites have 20%+ more listings than national portal sites, which also take 7-9 days longer than MLS sites to update listings. Also, when you are using a national portal site for a home search, 36% of homes appearing "for sale" are actually already sold or pending. For more information about how to receive access to our suggested MLS site, click here.
Myth #8: I can afford the maximum approved purchase price.
While your lender will analyze income and debt ratios for loan affordability, you need to determine what an affordable home budget looks like for you. Keep in mind the costs of regular home maintenance and improvements, utilities, cable, internet, and other large purchases you'll need for your home like furniture and appliances.
Myth #9: I can't buy a house if I have existing debt.
For pre-approval and full loan approval, your lender looks at various factors of your finances, including your existing debt, to determine mortgage affordability. Most lenders recommend that your mortgage payment, including principal, interest, taxes and mortgage insurance (known as PITI), be less than 28 percent of your gross monthly income.
Lenders also analyze your debt-to-income ratio, which includes your monthly obligations, such as credit card minimum payments, student loans, alimony, child support and car loans along with PITI. Lenders ideally look for your debt-to-income ratio to be at or below 36 percent of your gross monthly income.
Myth #10: I don't need a real estate agent.
In the era of DIY, homebuying is an area where it's best to consult a professional. In fact, the use of real estate agents has gone up substantially from 69% of buyers and sellers in 2001 to 88% of buyers and sellers in 2014.
A real estate agent will use their market knowledge to help you negotiate a purchase, find a home in your price range, coordinate showings, and walk you through the contractual steps of homebuying. To find a great real estate agent, ask for referrals from friends and family and look for someone with experience and credentials in your purchase area.
For more information about buying and financing your first home, download our free Mortgage 101 Handbook.