If you’ve never attempted to get a mortgage before, be warned: It can be a mystifying process. Toward that end, Forbes debunks six of the most common mortgage myths to help you go into the mortgage process feeling informed.
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Getting pre-qualified is the same as getting pre-approved
Although these two terms may sound the same, there is a world of difference between them. You can get pre-qualified in minutes just by answering a few questions about your financial situation. However, the pre-approval process is much more thorough. In this scenario, your financials are vetted by a lender before a decision is made. If you’re approved, you’re given a maximum loan amount based on how much the bank is willing to loan you. These days, a pre-qualification isn’t worth much. Sellers, by and large, prefer a pre-approval since that’s a much more accurate representation of your ability to actually buy the home. When preparing to purchase a home, make sure you get pre-approved and leave the pre-qualification behind.
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Shopping around for lenders will hurt your credit score
While it’s true that multiple inquiries on your credit can lower your score, not all inquiries are created equal. FICO allows for rate shopping by counting all similar inquiries made within the same 30-day period as one. This means you can visit as many lenders as you’d like as long as it all happens within 30 calendar days. Getting the best interest rate possible is important when it comes to buying a home. Even a fraction of a percentage point makes a big difference. It could mean thousands of dollars spent or saved during the life of the loan. Conventional wisdom states you should visit at least three lenders before making your final determination.
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You need perfect credit to buy a house
Your credit may not be spotless, but that doesn’t mean you can’t buy a home. These days, while conventional loans require a score of at least 620, loans backed by the Federal Housing Administration (FHA) only require a score of 580 for approval. Beyond that, there are options like finding a co-signer or agreeing to make a bigger down payment that can help reassure your lender.
That said, the interest rate that you’ll pay on the loan is also determined by your score. Therefore, you’ll end up saving in the long run if you make sure your credit is in the best possible shape before you buy. You can raise your score by making sure to make your payments on time every month and paying as far above the minimum payment as possible.
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You can’t be in debt and buy a home
Debt will impact your ability to buy a home, but with the vast majority of people carrying things like student loan debt and car payments, it would be unrealistic to assume that everyone who goes to buy a home will be debt-free. Instead, what matters is how much debt you’re carrying relative to your total income. When mortgage companies decide whether or not to approve you for a loan, they look at something called your debt-to-income ratio. This is found by taking the sum total of your recurring monthly debts and dividing it by your total monthly income. Ideally, to be approved for a loan, your ratio will be less than or equal to 36 percent. If your current debt-to-income ratio is too high to be approved at the moment, you have two choices. You can work to pay down some of your debts or find ways to generate more income. Don’t be afraid to talk to a lender about which solutions will have the biggest impact.
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You need to put down 20 percent
There was a time when putting down 20 percent was the gold standard when buying a home. However, in today’s market, most loans require less than 6 percent down. In fact, most FHA loans only require as little as 3.5 percent down and, if you qualify, loan programs through the Veteran’s Administration (VA) often don’t require any money down at all. Beyond that, there are many down-payment assistance programs and grants that can help you come up with the cash, especially if you are a first-time homebuyer. You’ll need to talk to your lender to see what programs are available in your area, but help is out there.
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The down payment is your only upfront cost
While the down payment is a huge upfront expense to buying a home, it isn’t the only one that you need to take into account. There also are closing costs to consider. These fees account for all the charges necessary to facilitate the transaction. They usually add up to 1 percent-2 percent of the sale price. Closing costs typically are split between the buyer and the seller. However, if you don’t have the necessary funds to pull that off, you do have the option of asking the seller to cover closing costs for you. In that case, though they would pay the fees upfront, your portion will likely be rolled into your mortgage to be paid over time.
