Nobody wants to have regret when it comes to something as important as buying a home. We help you make the right decision by busting mortgage myths.
Understanding What's Facts & What's Fiction
1) Mortgage interest rates are influenced by many different factors and may not remain consistent.
Fact. Although everyone wants this to be fiction, it's just not the case. Similar to the stock market, interest rates are always changing due to a variety of contributing factors. However, there's plenty of data and history available to help us make recommendations based on the state of the market. Our loan officers will use that information to help you lock in the best possible rate. On top of that, you can always refinance your loan when a more attractive rate is available.
2) You have to have a 20% down payment to qualify for and obtain a mortgage loan.
Fiction. This myth is something that many still believe to be true, but it couldn't be further from the truth. Several loan programs allow a borrower to buy a home with less than 20% down, and some programs will go as low as 3% down. Of course, each loan program has different requirements. Some are more stringent than others and require mortgage insurance, but there are still many ways to buy a home with a down payment lower than 20%.
3) If you are denied a mortgage once, you will never be able to secure approval for a mortgage loan.
Fiction. Just because you've had financial troubles in the past doesn't necessarily mean that you can never obtain a mortgage loan. Depending on what has occurred in your past, it may just mean that you need to improve a few facets of your financial life. Waiting for a bankruptcy to season, paying down a few credit card debts, or waiting until your savings account is a little bit more robust are just a couple of improvements that can be made to ensure that, down the road, you will be able to obtain a mortgage loan.
Of course, everyone's situation is unique and will require a customized plan on how to get there, but just because you've been denied in the past doesn't mean that you'll never again be able to obtain a mortgage loan.
4) There are conventional mortgage loan limits that are set on an annual basis.
Fact. Conventional mortgage loan limits (also known as, conforming loan limits) are reviewed by Fannie Mae and Freddie Mac on an annual basis. The review takes place to ensure that the limits align with the average cost of a home in a given area.
It's important to know that conforming loan limits will not make or break your home purchase. There are just more flexible terms available if you are within the limit for your geographical location.
5) Mortgage interest rates are the same no matter what lender you work with.
Fiction. The truth is that rates can vary from lender to lender. For your financial safety, you should shop around when you're looking for a mortgage loan.
It's also important to remember that rate isn't the only thing to consider when shopping for a lender. You will want to get a good feel for the customer experience offered by the company that you choose. The home buying process is much easier when you have a direct point of contact that's available to answer your questions along the way. Here are a few things to consider when selecting the right mortgage partner.
6) Your income and credit scores are the only factors that will determine your mortgage approval.
Fiction. When obtaining a mortgage loan, it's important to understand that the lender is completing an entire risk analysis on you as a borrower. Sure, how much money you make and your debt history will be huge factors in your risk assessment. However, many other factors go into securing approval on a mortgage loan. What type of work you do, the number of dependents you have, your tax payment histories, the stability of your income, other financial obligations, other properties you own, and many other factors go into a lender being able to give you the approval that you're seeking on a mortgage loan. We wish it were as easy as looking at your income and credit score, but unfortunately, this is not the case.
7) A mortgage prequalification and mortgage preapproval is the same thing.
Fiction. Prequalification occurs after your loan officer asks basic questions about your income, monthly debts, and credit score. They may pull your credit but probably won't require documents at this stage. If the information collected up to this point looks good, the Loan Officer can issue a prequalification. This prequalification amount estimates how much you may be qualified for - remember, because no documents were collected, it's truly just an estimate.
Now - how does a preapproval differ? A preapproval is based on a full loan application - not just a few upfront questions. We'll ask ALL necessary questions and review documents such as your tax returns, bank statements, and pay stubs. Because a preapproval is based on more in-depth information, it carries more weight than a prequalification.
Think of prequalification as a rough estimate of how much you could qualify for. And a preapproval is the verification process that takes place to confirm that initial estimate.
8) Your down payment is the only home buying expense that you will need to plan for.
Fiction. There are a few additional fees that you will need to pay at closing. Those fees are known as closing costs. Learn more about what closing costs cover here.
9) If you put less than 20% down, you'll be stuck with private mortgage insurance for the life of your loan.
Fiction. You can request that PMI is removed from your loan when you've paid a certain percentage of your loan balance. This percentage varies depending on the loan type and your down payment percentage. Learn more about eliminating PMI here.
10) FHA loans are only for first-time homebuyers or people with financial obstacles.
Fiction. It's often assumed that an FHA loan is exclusive to first-time buyers or those with an imperfect financial history. FHA loans are known for their flexibility. While they do help many that would qualify for another type of loan program, anyone can apply for an FHA loan.
11) USDA loans are only for people that live in rural or poor areas.
Fiction. Yes, USDA eligible areas are primarily in rural locations. However, you might want to consider reviewing the USDA eligibility map before making an assumption. There are eligible areas that would not classify as "rural." You may also consider moving to a USDA eligible area to finance your purchase with no money down.
12) A mortgage calculator will give me an exact estimate of my mortgage payment.
Fiction. Mortgage calculators are excellent tools to obtain a rough estimate of your monthly mortgage payment. However, they don't always account for local property taxes or various types of insurance. Remember to confirm your estimate with your loan officer to ensure that you can afford the home you plan to purchase.
13) A prior foreclosure or bankruptcy will prevent me from financing a home in the future.
Fiction. You can apply for a mortgage loan and obtain approval after a past foreclosure or bankruptcy. Each loan program has different waiting periods for foreclosure and bankruptcy. For bankruptcy, there's anywhere from a 1-4 year waiting period, and the waiting period is determined by the current status of the bankruptcy. In the case of a foreclosure, the waiting period varies greatly depending on the type of loan program. Conventional loans require a 7-year waiting period, while VA, USDA, and FHA requirements range from 1-3 years.
If you have a history of prior bankruptcy or foreclosure, it's best to schedule a meeting with your loan officer so they can learn more about your financial history and help you choose a loan program that would be the best fit for your unique financial situation.
14) You can qualify for a home with a charge-off.
Fact. FHA collection guidelines are more lenient than other loan programs. FHA collection guidelines will not require you to pay off the charge-off before closing if the charge-off is from more than 2 years ago. However, if the charge off is from the last 12 - 24 months, it may cause an FHA loan denial.
15) There's a minimum credit score requirement to qualify for a mortgage.
Fiction. There's no single requirement or magic number. Minimum credit scores vary depending on the loan program guidelines. Credit scores also do not provide the full picture. A mortgage underwriter will assess several factors to determine loan approval. Learn more about minimum credit score requirements here.
We hope that the myths turned facts above will give you a head start to your mortgage research process. And as always, we will be here to answer any questions you have about the mortgage process.