Most consumers want to own a home, according to a new Wells Fargo survey, but their incorrect ideas about what is necessary to obtain home financing may be keeping them from purchasing.
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While 72% of consumers agree that now is a good time to buy a home, the new data from the second "How America Views Homeownership" survey showed that consumers overestimate the credit score and down payment requirements to actually make a home purchase, as well as little knowledge of available loan programs and factors in home financing like current debt.
Credit Score Misconceptions
Two-thirds of surveyed Americans believe they need a very good credit score to buy a home, with 45 percent thinking a "good" credit score is over 780. In the mortgage world, a score over 780 is considered "excellent" or "top tier" while scores over 660 are considered "good" credit. Nearly a third of consumers are unsure of the credit score necessary to obtain a mortgage.
The truth about credit and homebuying: While a high credit score indicates that you are a responsible borrower and will likely get you a lower interest rate, 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, Compass Mortgage has the ability to finance FHA loans with credit scores as low as 580. For more information about what credit score is needed to buy a home, click here.
Down Payment Misconceptions
A whopping 36% of consumers still believe that a 20% down payment is required to purchase a home.
The truth about down payments: While a 20% down payment used to be the status quo, there are tons of loan programs that allow eligible borrowers to put down little to no money. For example, VA and USDA Rural Development loans provide 100 percent financing. Other low down payment loan programs include FHA, conventional, MyCommunityMortgage®, 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. Twenty percent of consumers believe that down payment gift funds cannot come from family members.
Loan Option Misconceptions
The study showed that consumers' awareness of different types of mortgages decreased from 2014. Survey respondents 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, ranging from 2% to 17% fewer.
The truth about loan options: Compass Mortgage has a full arsenal of mortgage types, ranging from first-time homebuyer and government-backed loans to home improvement, construction, jumbo and state-specific home loan programs.
When asked to identify factors that are or could potentially be their biggest hurdle to buying a home, 13 percent of respondents chose their existing debt. Within those respondents, 69% said they had credit card debt, 45% said student loans, 44% said car loans, and 26% selected other debt.
The truth about debt and homebuying: Current debt can affect how much an eligible homebuyer can afford in terms of a home's purchase price and mortgage payment. Most lenders recommend that your mortgage payment, including principal, interest, taxes and insurance (PITI) be less than 28 percent of your gross monthly income.
Lenders will also analyze your debt-to-income ratio, which includes your monthly obligations like credit card minimum payments, student loans, alimony, child support and car loans, along with your PITI. Lenders look at your debt-to-income ratio be at or below 36 percent of your gross monthly income.
Overall, credit, down payment, loan options and debt are considered factors in the mortgage process, but many potential homebuyers are simply misinformed about what it takes to buy a home. If you are interested in purchasing a home in the near future, contact one of our mortgage bankers or click below to get pre-approved.
For more information about home buying and financing in general, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.