The Truth About 8 Mortgage Myths

Buying a home can be exciting. It can also be stressful, confusing and expensive. Getting a handle on whether you’re ready to buy... what a mortgage will really cost... whether anyone will lend you money... can leave your head spinning. It’s easy to be swayed by a lot of misinformation and myths that exist out there – including ALL the advice you get from well-meaning friends and family. While you can certainly rely on a realtor’s experience and expertise, knowledge is power on your way to becoming a new homeowner. So before you check out real estate listings, swing by an open house or contact a realtor, get clear on what’s real about securing a mortgage and being a homeowner.

To keep things simple and helpful, we’re showing you the truth behind some common mortgage myths – so you can be the savviest homebuyer on the streets.

FACT:
In 2022, the typical
first-time homebuyer
was 36 years old.
Source: National Association of REALTORS®

#1 – Find a Home First, Worry About the Loan Later: Think about it: You wouldn't go shopping for cars without knowing your budget, right? You can’t test-drive a Ferrari when your financial situation is calling out for a Honda. The same thinking applies here. You need to know how much you can afford to spend so you can pinpoint the right cities, neighborhoods and homes that match up with your real estate plans and financial reality. Don’t over-dream your dream house by overestimating a mortgage payment you can’t feasibly take on. The sooner you secure pre-approval for a mortgage loan, the better position of power you will be in to know when and where you can jump on a house you love.

Before You Start House Hunting:

• Check your financial situation
• Review your credit score
• Know how much debt you're currently carrying
• If you need financial assistance from family, start those conversations early
• Seek pre-approval for a mortgage to get your financing in place

#2 - Pre-Approval and Pre-Qualify Mean You can Count On a Loan: Regardless of how both words sound, to get a "pre-approval" from a lender or to "pre-qualify" does not mean they will approve your loan in the end. Both are a way to establish your possible financial loan amount from the get-go so you know what houses are in your price range. While they're not the same, "pre-approval" status often does result in securing a loan. 

• Pre-qualify - This is a quick and easy estimate to get that tells you how much money you may be able to borrow to buy a home. Proof of income and debt is not required.
• Pre-approval - Here, the lender actually runs credit and verifies other financial data that you give them (Social Security numbers, employment, income, banking information, tax forms), and gives you a letter stating your loan approval amount. Once you get that approval, you are most likely to get the loan as long as nothing changes with your financial situation, like: You apply for another big loan (personal, auto) in the same timeframe; you lose your job; or your credit changes from first approval to loan time. 

FACT:
2 out of 3 Americans
think they need
“Very Good” or “Excellent”
credit to qualify for a loan.

#3 - Bad Credit Score? Big Debt? Forget About Finding a Loan: The average American carries all sorts of debt, from student and car loans, to credit card balances, medical expenses, and more. The good news is: Even with some knocks to your name, you'll find lenders are willing to work with you and you can qualify for a loan. Perfect credit is not needed - what is needed is your having a financial picture that a lender can get behind.

To Finance Your Loan, Lenders Will Look At:

• Your DTI or debt-to-income ratio - This is how much you can afford to pay on your monthly budget. It represents the percentage of your monthly gross income that you put towards recurring debt. A higher DTI ratio makes you a riskier candidate. 
• Your Credit Score - In assessing your mortgage application, your credit score is a big predictor of your loan-worthiness. A high credit score of 700+ indicates there's less risk that you'll default on payments, while a low score under 400 points can indicate potential problems. 

Where Does Your Credit Score Fit In?

Before you set out to find your dream house, know your current credit score. Many lenders use the FICO (Fair Isaac Corp.) model to assess your loan risk. A low score will make it harder to find a mortgage with good terms, but if your income is high and you can afford a bigger down payment, that can make you more attractive to a lender.

• 800 or higher: Exceptional
• 740-799: Very good
• 670-739: Good
• 580-669: Fair
• 579 or lower: Poor

Why It's Better To Have a Higher Credit Score

• Less hurdles when it comes to securing a mortgage
• Less likely to pay a higher interest rate
• More likely to get more favorable terms
• Reduces the stress of buying a home

Type of Loans and Minimum Credit Score Required

For the most part, there’s a loan for every potential home buyer. It just depends on your situation, so shop around and ask your realtor about any special loans that might help you more easily get into a new home.

• Conventional Loans - 620
• Fair Housing Administration (FHA) Loans - 500 (10% down payment) or 580 (3.5% down payment)
• U.S. Department of Agriculture (USDA) Loans - 640
• Veterans Affairs (VA) Loans - No minimum limit; at least 620 preferable
• Jumbo Loans - 720

Source: Bankrate

To secure the best mortgage deal, do what you can to raise your credit score well in advance of house hunting. And even if you do end up with a higher interest rate because of your history, beginning to pay a mortgage will go a long way to helping rebuild and restore your credit. Plus, you’ll still be a happy new homeowner – which was your goal, anyway.

FACT:
In 2002,
the average down payment
for a first-time home buyer
was 6%.
Source: The National Association of Realtors

#4 – You Need to Put 20% Down To Purchase A Home: That’s certainly been the “mantra” for any new home buyer just starting to look, because it can reduce your monthly payment, result in a lower interest rate, and put you ahead. But it’s not required. There are all sorts of scenarios you can consider to help you get into a home. Every buyer is different with their own financial history and budgets – and lenders know this. A well-qualified buyer can maybe get away with only 3% down on a conventional mortgage. Or nothing at all. If you do put less than 20% down, you’ll probably have to pay Private Mortgage Insurance (PMI), resulting in more closing costs and an added premium you pay each month to your lender to mitigate the risk they’re taking on with you. You can cancel your PMI payments once you achieve 20% equity in your property.

#5 – You Can Skip the Home Inspection: Easy there. You don’t want to get your heart broken by ending up with a lemon of a house. Nobody wants moving day to be full of surprises – the expensive kind. Once the seller accepts your offer, the purchase agreement is signed by both parties putting the house into escrow. This is the time to get an inspection done – before you close on the house and commit your hard-earned cash (and your heart.) Regardless of the cost, and believe it or not a home inspection is optional, it’s a way to check the working condition of the home you’re about to buy and a valuable move that can save you money later on. Even if you think you are handy and can spot or fix an issue (once you own the home), you are not trained or qualified to assess things in the same way as a professional can.  

Why a Thorough Home Inspection Is A Smart Move:

• You know what you're getting into and can avoid surprise repair costs
• You can check for warranties on existing appliances that you will soon "own"
  • Remember, not all warranties cover 100% of costs 
• If anything is broken or in need of repair
  • The seller is obligated to fix it before you move in
  • You can add a "contingency" clause to the offer in case you decide to back out of the deal
  • You can negotiate a price decrease or purchase credit and use those extra funds to fix any found issues
• You will feel confident on move-in day that you picked a good one

As the buyer, you arrange for a home inspection and it can run a few hundred dollars depending on the property's size, type of inspection, and state you live in. Have a realtor recommend a home inspection professional they have done business with and that you can trust. Overall, they check to see if the house is functioning properly and assess anything that can reduce its value.

 What A Home Inspection Looks At:

• Interior
• Exterior
• Structural system
• Roof system
• Plumbing system
• Heating and cooling systems
• Electrical work
• Water and sewage
• Fire and safety issues

#6 – You Only Have to Worry About Your Monthly Mortgage Expense: Here’s where you might be caught short if you do not have a 360° financial plan as a homeowner. Yes, your mortgage will be a big part of your monthly nut, but there are also other costs to be prepared for as well.

Additional Costs For A Homebuyer:

• Closing costs, which vary from 3% to 6% of the final sale price of the home
• Lender's fees
  • Federal law requires lenders to give you an estimate of all associated fees in a Loan Estimate document (related third-party vendor fees, appraisals, credit reports, title policy, pest inspection reports, escrow, recording fees, taxes, etc.)
• Annual property taxes, which vary by state
• Homeowners Insurance
  • You can opt to pay your taxes and insurance through your lender, if you have an escrow account
• PMI Insurance (see above)
• Ongoing home maintenance
• All monthly utilities
• Homeowners’ Association (HOA) or condominium association fees (if applicable)
• Unexpected incidences, like a flooded basement, burst plumbing pipes, wind damage to roof, falling trees, termite infestations, etc.

FACT:
In 2023, the average homeowner
pays $17,459 annually for expenses.
Source: Real Estate Witch

#7 – Home Maintenance Costs Are Not a Big Deal: Wrong, they can be a VERY big deal and many new homeowners forget to factor in these expenses – both expected and “out of the blue” ones. It would be great to just move in and think: “That’s it... we’re done!” And as much as you will enjoy your new home, you’re now responsible for anything and everything to do with it. It’s all part of being a homeowner. So while you’re buying new furniture and mentally decorating the new space, just be sure to set cash aside for regular maintenance of your new house (and any necessary equipment to do so), including the following:

• Gardening
• Landscaping
• Roof
• House painting (interior and exterior)
• Water heater
• Furnace
  • Good idea to purchase a service agreement
• Oil well (if you have one)
• Appliances - Washer/dryer, refrigerator, stove
  • Will need upgrading and/or replacement

#8 – Buying in Spring is Your Best Bet: Some things get said for so long that they become fact, when they’re not necessarily 100% true. These days, with the ever-changing real estate market conditions (i.e.: fluctuating economy, rising inflation, current mortgage rates, and the past pandemic) there’s no one perfect time to buy. Its true springtime is when many people start house hunting (houses look their prettiest!) – wanting to get in before summer vacations or the new school year. So many sellers list their houses to capitalize on this peak interest. But more shoppers mean more competition – and bigger bidding wars – for what’s on the market, too. If you’re flexible with timing, however, you might be able to negotiate an even better deal in another season. In the fall and winter, there are less people looking and more inventory on the market resulting in motivated sellers – something that could work to your benefit.

FACT:
In first quarter 2023,
U.S. homeownership
rate is 66%.
Source: Census.gov

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