You’re ready to buy a home, but you’ve recently heard something about mortgages that would stop you. Did you know there are several common mortgage myths that simply are not true?
If you buy into the wrong mortgage myth, you may think you can’t buy a home, when you really can. Let’s look at a few of the most common mortgage myths and the truth with each.
You need Great Credit to Qualify
Yes, great credit does help, but you can get a mortgage with a lower than average credit score. You don’t have to have a score above 700 or even 600 to get approved. However, a higher score does usually mean lower interest rates.
Sometimes, a lower credit score, along with other factors keeps you from getting approved. However, it’s only one qualification used by lenders.
For USDA loans, a score as low as 640 will likely be accepted, while conventional or VA loans you may get approved at a score of 620. If you apply for an FHA loan, you can have a credit score as low as 500 and still get approved.
Yes, if your score is between 500 and 579, it will be harder to get approved and you will likely need a larger down payment. However, you can still get approved for a mortgage, even an FHA loan.
You Have to Have a Large Down Payment to Get Approved
Just like the credit score mortgage myth, the down payment is just one factor used to get you approved for a mortgage. Yes, if you have a lower credit score, a larger down payment helps, but it’s not vital if you have a better credit score.
In fact, some conventional loan programs only require 3% down. Some first-time homebuyer programs even allow you to get help with the down payment through down payment assistance programs. Even FHA loans can be approved with a down payment of 3.5% and a credit score of 580 or higher.
With some USDA loans and VA loans, you may not need any money down. The amount you will need to put down to be approved for a mortgage depends on your credit score and other factors. This common mortgage myth keeps many from buying homes and it shouldn’t.
Hiring a Realtor is too Expensive
Technically, you can get approved for a mortgage and buy a house without a Realtor. However, it’s a good idea to have an expert REALTOR® helping you through the process. The good news, buyers don’t have to pay the commission, in most circumstances.
Typically, the home seller pays the real estate commission. With some types of realtors, you may have to pay something as the buyer, but it will certainly be less than the cost of trying to figure things out all by yourself.
I was Denied for a Mortgage Before, so I can’t get Approved Now
Even if you were denied for a mortgage last week, you may be approved by a different lender. Often, potential home buyers think because they were denied last year, they shouldn’t try again.
You could be denied again, that’s true, but it depends on why you were denied and what has changed since.
Were you are denied due to a low credit score, not enough money down, or a high debt-to-income ratio? Has your financial situation changed since you were denied?
If you’ve taken steps to raise your credit score, even if nothing else has changed, it could be the boost you need to get approved. Maybe you received a raise or you became married and have two incomes now. This could lower your debt-to-income ratio making it easier to get approved.
It’s also possible you’ve had time to save more money for a down payment. In some circumstances, if you had a low down payment, adding some funds will help you get approved.
Look at why you were denied and consider if your situation has changed before you believe this common mortgage myth. Maybe changing the amount of money you’re trying to get approved for will make the difference.
Some lenders may not tell you they can approve you for a $200K mortgage if you were applying for a $350K mortgage. This could open up the door to buying a smaller home or a starter home to get you out of renting.
You Need 20% Down to Buy a Home
This common mortgage myth is simply not true and we’ve already talked about it some. You do need 20% down if you want to avoid paying private mortgage insurance (PMI), but it’s not necessary to get approved for a mortgage.
A large percentage of buyers don’t have 20% down and don’t put 20% down. You just need to be able to afford to pay for PMI, unless you get a VA or USDA loan.
Prequalification and Preapproval are the same
Don’t fall for this common mortgage myth or you might fall in love with a house you cannot afford. Prequalification happens when a lender only collects very basic financial information. Preapproval happens when a lender has verified some of the financial information you’ve provided, such as income, employment, and a credit score.
Before you start shopping for a new home, you want to get a letter of preapproval with a stated amount you can borrow. This gives you power when you make an offer compared to another buyer without a preapproval letter from a reputable lender.
The Down Payment Also Covers Closing Costs
This common mortgage myth is not even close to the truth. When you put money down, you won’t be paying anything towards closing costs. Those are a separate charge you will need to take care of and often include the cost of the appraisal, title insurance, and other fees.
Usually, closing costs range from 3 to 6% of the total balance of the loan. Sometimes, you can negotiate to have the seller pay for a percentage of the closing costs, but this will be limited.
Applying for a Mortgage Hurts Your Credit
This nasty little mortgage myth has kept plenty of potential home buyers from applying for a mortgage. Yes, your credit takes a very small hit to the score when you apply for a mortgage. However, it’s incredibly minor and will barely be a blip on the radar.
The small hit you will take will only last a short time, too. You really won’t notice the difference unless you apply for multiple loans all within a short amount of time.
It’s Nearly Impossible to Get a Mortgage with Student Loans
Many first-time homebuyers are scared to apply if they still carry student loan balances. Student loans are no different than any other type of financing. If the payments fit within your debt-to-income ratio, they will be treated like any other debit.
As long as you have an acceptable DTI, student loans won’t keep you from getting a mortgage.
There are many common mortgage myths that might keep you from trying to buy a home. Make sure you know the truth before you believe any type of mortgage myth you might hear from a friend, co-worker, family member, or stranger on the internet.
It’s best to speak with a professional mortgage lender or your REALTOR® before you decide to throw in the towel over something that may not be true.