4 Mortgage Myths and Truths
When it comes to buying a home, it can be just as exciting as scary! Especially since we’ve all heard rumors and stories about what you should and shouldn’t do when buying a home. However, don’t let these myths intimidate you because many of them are completely false! This blog will go over 4 mortgage myths and truths so that you can make informed decisions that are not made under the assumptions of erroneous myths.
Myth #1: You Need 20% Down to Purchase a Home
Many people mistakenly believe that you cannot buy a home if you don’t have at least 20% down. This is not true. As a matter of fact, if you take out a conventional loan, you can buy a home with as little as 3% down. There are even some government-backed loans that have 0% down payment requirements.
So where does the percentage 20% come from? The 20% myth comes from mortgage lenders’ private mortgage insurance requirement. PMI serves to protect your lender if you default on your mortgage loan. For example, let’s say Bruce has less than 20% down. His lender will require that he pay PMI. PMI gives Bruce no benefits or protections as the buyer and can add a hefty sum to his monthly payment.
The PMI requirement is the reason why many financial experts recommend that people wait to buy their homes until they have 20% down. Other types of loans (like USDA loans and VA loans) don’t require PMI but may require you to pay a different kind of insurance or funding fee.
Myth #2: Prequalification is the Same as Pre-Approval
Prequalification is not the same as pre approval. The major difference between these two is the level of verification your lender conducts before issuing you an estimate. When you get a prequalification, your lender only collects basic financial information. The majority of lenders rely only on self-reported financial data when issuing prequalifications.
When you get preapproved for a mortgage loan, this indicates that your lender has verified at least some of your financial information. Lenders usually do this by asking you to submit a bank statement, or by viewing your credit report. Pre-approval is a lot more accurate than a prequalification.
Remember that even if you are preapproved, you aren’t guaranteed to close a loan. After you’ve found a home and made an offer, you will still need an appraisal before you can secure your loan.
Myth #3: You Must Have Perfect Credit to Qualify for a Mortgage
Yes, credit does play a major role in your ability to get a home loan. However, this does not mean that you cannot buy a home if you don’t have a perfect credit score. There are various mortgage solutions for those who have lower credit scores.
If you have a low credit score and you’re buying your first home, you can consider using an FHA loan. This is a government-backed loan with insurance from the Federal Housing Administration. This insurance allows lenders to issue FHA loans with lower credit requirements than a conventional loan.
Myth #4: I Can’t Afford a Home
If you can afford to pay your monthly rent, chances are you can afford a monthly mortgage payment as well. Of course, it’ll require more sacrifices, but it can be done. A tool that can help you find out if you’re ready to buy a home is our Mortgage Number Calculator. Your Mortgage Number illustrates your overall strengths and weaknesses in today’s mortgage environment. By inputting your financial information, you’ll get a number that provides insights on whether you’re financially able to take on a commitment of a mortgage or not. It’ll let you know if you’re prepared to buy a home or if you need to step back and save a bit more money in the meantime.
Buying a home is a life-changing decision. That’s why it’s important that you get informed and use all the tools at your disposal to make the best decision. We hope this blog helped clear up mortgage myths that had you in doubt. To see if you’re prepared to buy a home, use our Mortgage Number calculator by clicking here!