Purchasing a home and obtaining a mortgage can be an overwhelming process, especially for first time buyers. Beyond that, there’s a good deal of misperception around the topic. Below are five of the most common mortgage myths, debunked.
Myth #1: “Homes are no longer affordable.”
With record low inventory and extremely high demand, it’s true that many homes listed today are not only selling fast, but are selling for over asking, leaving many to believe that it’s becoming too expensive to afford a home. However, today’s low interest rate environment gives people buying power than it did a year ago because rates have come down faster than home prices have gone up. To simplify it, lower rates mean a lower monthly payment, which means buyers have a larger home purchase budget to work with.
Myth #2: “I can’t buy a house until my student loans are paid off.”
It’s true that lenders take a borrower’s debt into consideration before approving them for a mortgage, but it would be unrealistic to assume that everyone who goes to buy a home does so debt-free. So although you may have student debt, car payments, or other loans, what matters is how much debt you are carrying relative to your income. As part of the mortgage process, a lender will assess 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.
Myth #3: “I have to come up with a down payment myself.”
One of the greatest barriers to entry in home buying is coming up with a down payment. Therefore, many first time buyers use gift funds as part of their down payment. If you plan on getting gift funds from a friend or family member, you’ll need a gift letter confirming your relationship to the giver. The letter also must indicate that the money is a gift and that there is no expectation of repayment. Usually, the letter is signed by both interested parties. The specifics on gift money depend on the loan products, so it’s best to talk to your lender about your specific situation first.
Myth #4: “I have to put 20% down to buy a home.”
One persistent myth is that a 20% down payment is required. In fact, roughly 80% of first-time homebuyers make down payments that are less than this. If you don’t have 20% down, fortunately, there are a ton of mortgage products out there that allow low down payments, starting as low as 3% down.
The 20% figure simply determines whether private mortgage insurance (PMI) is necessary. Most lenders don’t require PMI when a homebuyer puts down 20% or more on a conventional loan, whereas a down payment below this percentage means PMI becomes part of the equation.
For qualified borrowers who need a little help on the front end, there are dozens of down payment assistance programs (DPAs) to consider.
Myth #5: “I should go with the lender with the lowest rate.”
While finding the lowest available interest rate is important, there are many other factors to consider when selecting your mortgage lender. You’ll want to find out a lender’s fees or if you are paying points to get that low rate.
Additionally, especially in today’s competitive market, you’ll want to work with a lender that is experienced, can deliver quick, reliable service, and who can help educate you on the process. When making likely one of the largest investments in your life, it’s important to work with a lender and a team you can trust.