So you wanna buy a house: 10 mortgage myths debunked
There are a lot of myths around the homebuying experience. As a loan officer, I hear some of them every week when talking to friends and prospective borrowers. I hear them even more often when I am talking to recent college grads and first-time homebuyers. When potential buyers put the loan process on hold after hearing intimidating and possibly incorrect information, they pay the price for putting it off. Here are some common myths about the mortgage process debunked:
1. You must have at least 20 percent of the home price for a downpayment.
I hear this everyday, especially when talking to first-time homebuyers. Borrowers assume that you need to put 20 percent down to purchase a home. The fact is that there are programs that allow people to buy homes for as little as 0 to 3 percent of the purchase price down.
2. A 30-year mortgage is always the best option.
The 30-year fixed-rate mortgage has become the most notable product in the mortgage industry, but it might not be the best option for you. Everyone’s financial situation and personal goal for home ownership is unique. There are plenty of options besides a 30-year fixed-rate mortgage that might be more appropriate for your individual situation.
3. Adjustable rate mortgages are bad.
Adjustable rate mortgages, or ARMs, have gotten a bad name since the 2008, when interest rates rose as house prices fell. An ARM is a loan with an interest rate that is initially locked in for a period of time and then is adjusted periodically based on the market. During the 2008 housing bubble burst, houses were nearly impossible to sell, and homeowners with ARMs would be stuck as their interest rates continued to rise. Today, ARMs, when used correctly, can be a great option. For example, a family buying a starter home with the intention of living in the house for five to seven years could choose to a 10-year ARM. The buyers could lock in for 10 years at a lower interest rate than they would get with a fixed-rate mortgage, and they’ll be long gone before the ARM hits its adjustment period.
4. You need to have perfect credit to qualify.
When buying a house, credit generally raises the most questions and concerns. Borrowers believe they need a high credit score with few or no derogatory marks to qualify for a loan. In truth, there’s no such thing as “perfect credit." We are all human, and mistakes happen. Each program has its own qualifying score minimum, which gives options to borrowers with lower credit scores.
5. An FHA (Federal Housing Administration) loan is the only option for first-time homebuyers.
First-time homebuyers often do not have a lot of money to put down. They learn about the FHA loan program that requires only a 3.5 percent down payment and think this is the be-all and end-all. The reality is that there are some conventional loan programs that, if the borrower qualifies, require as little as 3 percent down. An added benefit of a conventional loan is that the monthly mortgage insurance rate may be better than the mortgage insurance rate for an FHA loan. There are also some government programs, like loans from the USDA and VA, that, if the borrower qualifies, require no down payment.
6. Mortgage insurance will stay on for the life of the loan.
Mortgage insurance is required when a borrower does not have 20 percent of the home price to put down towards the loan. It is a necessary “evil.” Despite the way it seems to hover over each monthly loan payment like a dark cloud, not all mortgage insurance stays on for the life of the loan. On some products, the mortgage insurance goes away once the homeowners achieve 20 to 25 percent equity in their home. In most cases with FHA loans, mortgage insurance does indeed stay on for the life of the loan (though there are some cases where, if you pay more than 3.5 percent of the home price as a downpayment, the mortgage insurance can be removed at a certain point). Under certain circumstances, borrowers can refinance their FHA loan and potentially remove the mortgage insurance.
7. Loan pre-qualification and pre-approval are the same thing.
A pre-qualification is when a borrower fills out an application for a mortgage with no supporting documentation. The lender takes the word of the borrower regarding income and assets. A pre-approval is when a borrower gives supporting documentation to prove income and assets, which are then verified by the lender. Pre-qualifications are virtually worthless in the lending world these days. Some realtors will hesitate to facilitate home offers unless a pre-approval has been given. If, when it comes time for a pre-qualified borrower's income and assets to be verified, the real numbers don’t match the numbers used for the pre-qualification, a deal could fall apart.
8. You must have two years at the same job to qualify for a mortgage.
This is not true for every situation. If you just started your own business, you may need to wait until you have two years of work history before you can qualify for a mortgage. However, if you’re an independent contractor and switch companies, but stay in the same industry, you may still qualify for a mortgage. If you’re a W-2 employee, you may only need to have been employed steadily for the past two years, industry notwithstanding. Students that are just getting out of college and accepting a salary position can also qualify without two years of experience. Other work situations may also qualify with less than two years of work history.
9. Renting is always cheaper.
Many landlords use tenants' rent to pay for their mortgage, as well as for extra income. Why pay for your landlord’s mortgage when you can pay your own and start building equity?
10. The seller will make repairs based on the home inspection report.
Unless you or your agent negotiates this with the seller and has it added to the home sale agreement, the seller is not required to make repairs based on home inspection results. In some situations, the seller will not offer any assistance to cover the costs of repairs, and borrowers would be responsible for these costs.
These are just some of the reasons that it is always a good idea to reach out to a licensed mortgage professional when you're on the market for a new home so that her or she can analyze your unique situation.
Dom Via started in the lending world in 2017. He is currently a certified loan officer at Fairway Independent Mortgage Corporation's Mechanicsburg office and is the youngest member of the team there. Via currently serves on the board of West Shore Young Professionals and graduated from Millersville University in 2014 with a bachelor’s degree in business administration.