10 Mortgage Loan Myths To Ignore
July 5, 2022
There’s a certain mysticism that surrounds the mortgage loan process. It’s something that everyone goes through, and yet these myths that float around across the internet and by word of mouth make the entire process seem that much more difficult.
To clear the air on the mortgage loan process, we’ve pinpointed the most talked about myths so we can clear the air. These include:
MYTH: You NEED 20% For Your Down Payment
The “20% Down Payment” rule has existed for decades, leading many to believe that home ownership was impossible unless you were able to put down 20% of the home value. As an example, you would need $80,000 upfront to even be considered for that house. This isn’t the case, with many homeowners able to secure a mortgage with as little as 3% down! The 20% myth comes from the inclusion of private mortgage insurance, or PMI. PMI gets tacked onto your monthly mortgage payment, only being removed once you reach 20% home equity. PMI protects the lender rather than the home buyer, and the buyer has to cover the costs of it.
MYTH: “Pre-Qualification” And “Pre-Approval” Are Interchangeable
While pre-qualification and pre-approval may sound very similar, they have distinct differences that can be the difference between securing a house or not. During the pre-qualification process, the lender collects basic self-reported financial data to provide you with a general estimate of how large of a loan you’d receive.
A pre-approval, on the other hand, provides you with an accurate amount of how much you’d be approved for. You’ll be required to provide financial documentation and most likely allow the lender to run a credit report. Keep in mind that a pre-approval does not guarantee that you’ll close the loan, as you’ll still need an appraisal prior to closing and securing your loan.
MYTH: The Down Payment Covers All Additional Costs
One of the biggest pitfalls prospective home buyers fall into is the idea that their down payment covers all additional costs during the home buying process. They’ll exclusively save to have enough for their down payment, completely disregarding the additional payment required to cover closing costs. Closing costs are completely separate from your down payment, ranging from 3%—6% of the home’s price.
MYTH: You Need A Massive Credit Score To Secure A Home Loan
Your credit score is one of the largest components mortgage lenders review when deciding if you’re approved for a loan or not. Your credit score is a good indicator of your history with credit, however you don’t need a flawless credit score to secure a home loan.
In fact, there’s several mortgage loan programs designed to allow home buyers with a lower credit score to secure a home, such as the FHA loan. The Federal Housing Administration loan, or FHA loan, allows you to buy a home with as little as 3.5% down and a credit score minimum of 580. Keep in mind, though, that you’ll have to pay for PMI until you reach the 20% equity threshold.
MYTH: Having Debt Ruins Your Chances Of A Home Loan
The “you can’t get a home if you have any debt” myth has commonly floated around for years, but this just isn’t true. Most if not all people have some sort of debt. This can include common sources such as student loans, car loans, credit card debt, even phone bills!
Your lender will look at your debt-to-income ratio, or DTI, to determine the percentage of your monthly income against your monthly debts. A high DTI will make you appear much riskier to lend to than a home buyer with a lower DTI, however you should have no issues securing a home loan should your DTI be 50% or lower.
MYTH: You Should Spend The Amount You’re Approved For
You jumped into the housing market with a budget of $300,000, but ended up getting approved for a home loan of $375,000. Congrats! With that said, don’t jump out of your budget just because you were approved for more. You’ll still have to pay a monthly mortgage payment, which increases accordingly against the amount of the home.
Don’t find yourself unable to afford your mortgage just because you bit off more than you can chew, and stick to the budget you originally set for yourself.
MYTH: If You’ve Been Denied A Mortgage Before You’ll Never Be Approved
Being denied a mortgage loan for any reason can be incredibly discouraging. It can make it seem like home ownership will forever be out of reach. If you’ve been denied a mortgage loan, don’t stress—you absolutely can secure a home loan, so long as you put in the work. You’ll have to work on things such as paying off existing debts, paying bills on time, and raising your credit score to an acceptable number.
While denial is discouraging, it doesn’t mean you’re doomed. It will take time to work on your financial situation, but home ownership can be attained!
MYTH: You Should Always Get A 30-Year Mortgage
The 30-year mortgage has reigned supreme in the U.S. as its prolonged nature means lowered mortgage payments. However, with lowered mortgage payments over a longer course of time, means more interest paid on your mortgage.
If you have the funds available, a 15-year mortgage may actually be the better option. You’ll have a higher monthly mortgage payment, however the total interest paid is drastically lower than on a 30-year mortgage. Additionally, you’ll accrue equity in the home much faster. While the 30-year mortgage is certainly a good option for certain buyers, it’s not the end all be all.
MYTH: FHA Loans Are Only For Home Buyers With Little Credit
As mentioned earlier, an FHA loan offers terms for those with a low credit score (min 580). While it’s the ideal option for borrowers without a large down payment amount, it’s also great for first time home buyers looking to take advantage of the low interest rates offered on FHA loans.
MYTH: Securing A Mortgage Is Stressful
Long gone are the days of the mortgage process being a headache for everyone involved. The fact of the matter is: the mortgage is as easy as your lender allows it to be. Thankfully, the team at ABSM makes the mortgage lending process as simple as possible. You can count on our team of highly experienced MLOs to walk you through each step of the process, leading to your very own home. To take the first step, contact us today for a free consultation, or begin the pre-approval process online!