Buying a home is an exciting journey, but it's also a complex process filled with myths and misconceptions— especially when it comes to getting a mortgage. In this article, we're going to debunk the top ten mortgage myths that often confuse and mislead homebuyers. You may just learn that the house of your dreams is closer in your reach than you thought!
Debunking 10 Common Mortgage Myths
By separating fact from fiction, you will be armed with the knowledge needed to make informed decisions about your mortgage.
Myth #1: You need a perfect credit score to get a mortgage.
Fact: Having a perfect credit score is not a requirement to secure a mortgage. Lenders take a holistic approach and consider various factors when evaluating mortgage applications, such as credit history, income, employment stability, and debt-to-income ratio.
Mortgage loan officers also understand that individuals may have faced financial setbacks or credit challenges. While a good credit score improves your chances of securing favorable terms, there are loan programs available for borrowers with lower credit scores, including FHA loans and other government-backed loans.
Myth #2: The interest rate is the only important factor in a mortgage.
Fact: While the interest rate is a significant factor in a mortgage, it is not the only important consideration. Other factors— such as loan term, closing costs, and loan features— play crucial roles in determining the overall affordability and suitability of a mortgage. Therefore, choosing a mortgage based solely on the interest rate can overlook important details.
Pro tip: Most folks don’t stay in their first house forever—meaning your interest rate isn’t forever, either. The interest rates may be high now, but you might sell the house in five years, or find an opportunity to refinance to a lower interest rate.
Myth #3: You must have a 20% down payment to buy a home.
Fact: While a 20% down payment is often recommended to avoid private mortgage insurance (PMI), it is not a strict requirement. There are various mortgage options available that allow for smaller down payments, making homeownership more accessible for many buyers.
Many loan programs, such as FHA loans or conventional loans with private mortgage insurance, offer opportunities for buyers with down payments as low as 3% to 5%. These options can be beneficial, especially for first-time homebuyers or those who may not have substantial savings for a large down payment.
Myth #4: Adjustable-rate mortgages (ARMs) are always a bad choice.
Fact: Adjustable-rate mortgages (ARMs) can be a suitable option for some homebuyers, depending on their financial goals and circumstances. ARMs typically have a fixed rate for an initial period, followed by periodic adjustments based on market conditions.
While ARMs come with the potential for rate adjustments, they also offer lower initial interest rates compared to fixed-rate mortgages. This can be advantageous for buyers who plan to sell the property or refinance before the adjustable period begins. Moreover, ARMs may be beneficial for those who expect their income to increase or plan to move within a few years.
When weighing your loan options, carefully consider your financial situation, future plans, and the specific terms of the ARM before making a decision.
Myth #5: You should start working with a lender after you've found the home you want to buy.
Fact: It's always best to start working with a lender before you begin searching for a home. Getting prequalified for a mortgage allows you to understand your budget, improve your negotiating power, and streamline the homebuying process. Engaging with a lender early on allows you to make informed decisions and navigate the homebuying process with greater ease.
Myth #6: Getting a mortgage will damage your credit.
Fact: Taking out a new mortgage does not mean you’ll have damaged credit until you pay it off. While applying for a new mortgage can have an impact on your credit score, it is typically minor and temporary. On the flip side, responsible management of your mortgage can actually improve your credit over time!
Myth #7: You can only get a mortgage from a traditional bank.
Fact: While traditional banks are common sources of mortgage financing, there are various other options available. Mortgage loans can also be obtained from credit unions, online lenders, and mortgage brokers.
Credit unions often offer competitive rates and personalized service to their members. Online lenders provide convenience and streamlined application processes. Mortgage brokers can help you access multiple loan options from different lenders, potentially finding the best fit for your needs.
It's important to shop around and compare offers from different types of lenders to find the best mortgage terms and rates that align with your preferences and financial situation. By exploring a range of lender options, you can increase your chances of finding a mortgage that suits your needs and offers favorable terms.
Myth #8: Refinancing your mortgage will always save you money.
Fact: While refinancing your mortgage can potentially save you money, it is not always the best money move.
Refinancing typically involves closing costs, which can offset the potential savings. It's important to carefully evaluate the costs involved and calculate how long it will take to recoup those expenses through lower monthly payments or interest savings.
Additionally, if you plan to sell your home in the near future, the savings from refinancing may not outweigh the costs incurred. It's crucial to consider the breakeven point and assess whether refinancing aligns with your financial goals and timeline.
Myth #9: You can’t get a mortgage if you’re self-employed.
Fact: Contrary to this belief, being self-employed does not automatically disqualify you from obtaining a mortgage. While it may require additional documentation and a different approach, many lenders will work with self-employed individuals to find a solution that gets them in the home they want!
Myth #10: You can’t get a mortgage with student loan debt.
Fact: Having student loan debt does not disqualify you from obtaining a mortgage. Lenders consider various factors, including your debt-to-income ratio and overall financial stability, when evaluating mortgage applications.
While student loan debt can impact your debt-to-income ratio, lenders will consider your entire financial profile. By demonstrating a stable income, managing your debt responsibly, and maintaining a good credit score, you can increase your chances of securing a mortgage.
Know the Truth Behind Your Mortgage
By understanding the truth behind these common misconceptions, you can approach your mortgage journey with more confidence.
Keep in mind that everyone’s financial situation is unique, and talking to a local mortgage lender that can walk with you through every step of the process is the best way to get personalized advice.