You’ve been diligently working on the steps to go from renting to homeownership, setting aside money for a down payment and paying down your credit cards, but are you still buying in to some of the biggest homebuying myths?
You need perfect credit to qualify for a mortgage.
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 560.
You need 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.
School districts don’t matter if you don’t have school-age children.
The quality of schools should always be a factor in your purchase decision whether you’re an empty nester or don’t plan to have children in the future. A recent study by ATTOM Data Solutions found that the average estimated home value for homes with at least one good school in their zip code is 77 percent higher than the average value of homes in zip codes that lack high-performing elementary schools.
You don’t need a real estate agent.
In an era of DIY and self-education, 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.
Finding a home to buy is the first step of the process.
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, your 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.
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.
Borrowers 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.
Also keep in mind that after closing, you’ll likely need to have some cash set aside for items that will make your house a home like furnishings, paint, appliances, moving, etc.
A 30-year conventional loan is your only option.
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.
Speak with a mortgage banker to see what mortgage program and loan term best suits your financial needs and goals.
A clean home inspection report means you won’t have 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.
A good rule of thumb is to plan on spending 1 percent of your home’s purchase price on home maintenance each year.
You can afford the maximum pre-approval amount.
On paper, yes, you can afford the maximum purchase price, but a few things first. While your lender will analyze income and debt ratios for loan affordability, you need to determine what an affordable mortgage payment 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 you home like furniture and appliances.
You can’t buy a home with 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.
For more information about what it takes to purchase your first home, download our free Mortgage 101 Handbook for loan types, credit score information and more.