In our Fundamentals series, Rate Simple breaks down loan concepts for ordinary people.
The home mortgage world can be a confusing place, what with all the terms, regulations, special considerations, and sheer variety of lenders out there. Because of the number of variables, myths often run rampant and get interpreted as facts. Here we break down the seven most common mortgage myths, separating fact from fiction, all so you can get the clarity you deserve.Get a Home Loan Quote
Myth 1: You Can't Afford a Home
Typically, if you can afford to make your monthly rent payments on time, you can afford a mortgage. This, of course, depends on where you live. A typical rent in Los Angeles, say, generally won't be as high as a mortgage payment in the same part of the city (which is why so many Angelenos rent). But the overall takeaway here is that the dream of owning a home is more attainable than most people realize. Don't sell yourself short!
Myth 2: Find a Home First, Then Worry About Financing
Don't get talked into house hunting before you know how much house you can afford. Yes, it is very tempting to just pop on the internet for a few minutes and check out the market. Thanks to major advancements in technology, you could be virtually walking through a living room in a home two states away!
People often fall in love with homes that are out of their budget, and then spend time trying to figure out how they can afford said home rather than finding one that more closely aligns with their financial situation. Living outside of your means is a dangerous game to play. Instead, make sure you are setting yourself up for success.
Start shopping around for lenders and different financing options, as there are many varieties to explore. It's much easier to find a home when you have a better understanding of your budget and the mortgage world in general.
Myth 3: Shopping Around for Lenders Will Really Damage Your Credit Score
A lender will need to run a credit check on you, yes. Otherwise, how could the lender discuss your specific options? The common misconception here is that every single lender you go to will run a credit check and that over time, all these will add up and severely hurt your credit standing. And what do you need to receive competitive mortgage rates? Good credit.
It's important to understand how credit bureaus work, and to do your homework before allowing one lender to do a credit check. Credit bureaus can tell if you're shopping around for the best mortgage rates, and will typically bundle those credit checks into one inquiry. That inquiry will, yes, have a slight impact on your score but nothing detrimental. Where people go wrong, is they aren't prepared and those credit pulls get spread out over a few weeks.
Generally speaking, these credit checks will be counted as one inquiry if they are all done within 14 days of the first one. This window varies, and could even be up to 45 days, so, again, be sure to do your homework before getting started.
Myth 4: Prequalification Is the Same As Preapproval
Most of us have prequalified for something, usually a credit card. That doesn't mean that company is simply going to hand over said card. Understanding the difference between mortgage prequalification and preapproval is vital.
Mortgage prequalification: A good indication that you possess the creditworthiness that lenders are looking for. This is an early step in the home purchase journey and is a very rough estimate of the amount you might be able to borrow. Prequalification helps shoppers begin the house-hunting process.
Mortgage Preapproval: Preapproval is more definitive than prequalification. Preapproval means you have completed a mortgage application that the potential lender has evaluated. The lender will provide you with a preapproval letter, which provides information on the specific terms and amount you can borrow.
Myth 5: Getting Preapproved Guarantees a Loan
Yes, getting preapproved is a good thing, but it does not guarantee that the lender will offer you a loan. Rather, it indicates that if you were to go through underwriting, you would likely be approved.
So why bother with mortgage preapproval at all? Preapproval is a very helpful step in the home purchase process, as it shows sellers that you are serious. It also makes real estate agents more inclined to work with you, as again, you come across as a serious buyer who has done your homework. Don't underestimate the power of the preapproval!
Myth 6: You Need an Impeccable Credit Score
Your credit score is indeed a crucial factor when it comes to the home mortgage process, which instills panic into potential homebuyers who may have less-than-perfect ratings. Look at it like this: your credit score helps lenders determine the amount of risk they are taking by lending you money. So while it is always beneficial to have a high credit rating, a lower score doesn't necessarily exclude you from obtaining a home loan.
A subprime credit score shows more risk for the lender and, in turn, will most likely be accompanied by fewer choices and higher interest rates than someone with a better rating. If you have a credit score below 579, you may want to explore your Federal Housing Administration (FHA) loan options.
Myth 7: You Need 20% Down (and That Covers All Upfront Costs)
We have all heard this one: you have to put 20% down on a house. In today's world, that's just not true. In fact, the average down payment amount for a first-time homebuyer is just 7%! Most people want to put a higher percentage down, as this could mean a smaller loan amount and lower monthly payments. However, don't worry if your savings just aren't there yet. There are still plenty of home mortgage options available to you.
What tends to throw people off is thinking that the whopping 20% you put down covers all of your upfront costs. Be mindful of the terminology used and pay close attention to your loan terms. In many cases, the closing costs are a separate payment. Closing costs include the fees and taxes that come with the actual handling of the loan and processing the real estate purchase paperwork. This is all specific to the type of loan that you have. Make sure you're earmarking some of your money for the closing costs, rather than funneling it all into the down payment.
Go Into the Home Mortgage Process Informed
There is a lot of misinformation out there, and even more misconceptions when it comes to home loans. Make sure you are not falling prey to common mortgage myths. And when you are ready to shop for a home loan, turn to Rate Simple, where we specialize in designing mortgages to meet people's individual needs.Get a Home Loan Quote