When you are searching to buy a home, you are more than likely going to stumble upon some antiquated myths about mortgages, like having to put 20% down or every lender is the same. We’re here to help you debunk these homebuying myths so that you can better understand how to get a mortgage.
MYTH #1 – YOU HAVE TO MAKE A 20% DOWN PAYMENT
Back in the day, banks used to require that homebuyers put down at least 20% for a home as a way of protecting the bank for borrower default. Today, we know that making a 20% down payment just isn’t a feasible option for many borrowers.
If you know that putting 20% down is an old myth, you might still be wondering, “How much down payment do I need for a house?”. You aren’t alone; many homebuyers wonder what they could afford if they can’t make a 20% down payment. The National Association of Realtors reports that the average down payment on a house among first-time homebuyers is typically 6%.
It’s important to know what all of your options are so that you can find the mortgage that works with your down payment budget. The loans below are some examples of mortgages with flexible down payment options:
- FHA Loan – Backed by the Federal Housing Administration (FHA), an FHA loan may require as little as a 3.5% down payment. It also features more flexible income and credit requirements as well as low closing costs.
- VA Loan – Partially guaranteed by the U.S. Department of Veterans Affairs (VA), a VA loan is designed for active and retired military personnel, or qualifying spouses. Benefits of a VA loan can include, but aren’t limited to, no down payment requirement1, higher loan value and no private mortgage insurance.
- USDA Loan – Guaranteed by the U.S. Department of Agriculture (USDA), a USDA home loan for borrowers in qualifying rural areas and suburbs. Some benefits of a USDA loan are no down payment requirement, lower standard interest rate and flexible credit requirements.
- Down Payment Assistance Programs2 – Certain assistance programs, like Home Possible® from Freddie Mac and HomeReady® from Fannie Mae, could require as little as 3% down for qualified borrowers. Learn more about down payment assistance programs here.
Although some loans may not require a 20% down payment, a borrower may be required to get private mortgage insurance (PMI) if they can’t put 20% down. Talking with a mortgage professional can help you understand the ins and outs of down payment requirements. Connect with your local PrimeLending mortgage expert to get a better idea of what you can do with your down payment.
MYTH #2 – IT’S CHEAPER TO RENT THAN TO OWN
Some homebuyers may be under the assumption that it is cheaper to rent than it is to buy a house, which is not altogether true. There are factors associated with both renting and buying that can make one more budget-friendly than the other like location, market conditions and your lifestyle, to name a few.
When you are a renter, you aren’t responsible for the costs of maintaining your space and you have the flexibility to move with relative ease should you need to relocate. However, when you buy a home, you have the freedom to live the way you want and to add your own style. Not to mention you also have the opportunity to build home equity and stable cost of living, unlike rent prices that rise each year.
The best thing you can do to understand if it is cheaper to rent or buy a house is to use a renting vs. buying calculator. This will break down the numbers so you can compare the cost of renting to the cost of buying and see what works for your financial goals.
MYTH #3 – YOU HAVE TO BE DEBT-FREE TO BUY A HOUSE
Did you know that you can buy a house if you have other debts? It’s all about finding the right mortgage product for your budget. And, while debt does factor into your ability to get a mortgage, it is not the end all be all. In fact, what is more important than your debts themselves is how they compare to your income; lenders call this your debt-to-income ratio (DTI). To calculate your DTI, add up all of your monthly debts (student loans, car payment, credit card debt, etc.) and then divide that total by your gross monthly income.
DTI % = (Total Monthly Debt ÷ Gross Monthly Income) x 100
Typically, the acceptable debt-to-income ratio for a mortgage is 43%, however this can vary based on your lender and what type of home loan you need. Keep in mind, the lower your DTI, the more mortgage benefits and loan programs you are likely to qualify for.
Sometimes, having debt can work in your favor if you are using it as a way to build your credit score. According to Experian, one of the major credit reporting agencies, credit scores are determined on a scale between 300 and 850.
Want to know how much home you might be able to afford? Use this home affordability calculator to discover how much you may be able to spend on a home with your current debts.
MYTH #4 – A 30-YEAR FIXED RATE MORTGAGE IS THE ONLY OPTION
There’s more than one way to climb a tree and there is more than one way to finance your home purchase. One option is the 30-year fixed-rate mortgage whose popularity is probably at least partially responsible for the myth that it is the best and only way to buy a home.
What makes a 30-year fixed-rate mortgage a popular option? For one, a 30-year fixed mortgage rate may be lower than other mortgage options as the life of the loan is longer. In turn, borrowers could make lower monthly payments. But an adjustable-rate mortgage could be a viable option if you want a different home loan option.
While a 30-year fixed-rate mortgage is an option for borrowers who plan to stay in the area for a long time or want predictable monthly payments, there are other options for people who may be looking for something with a bit more flexibility. Here are some alternatives:
- 15-year fixed-rate mortgage – The monthly payments may be higher on a 15-year fixed mortgage, however since the term is shorter borrowers could expect to pay less in interest over the life of the loan.
- Adjustable-rate mortgage (ARM) – Unlike a fixed-rate mortgage, an ARM has an interest rate that adjusts based on the market rate. An ARM typically has a lower initial rate than a fixed mortgage. This rate will change once the introductory period ends and will change per the terms of your loan. Common ARM options include 15/6, 10/6, 7/6, and 5/6. The first number represents the length of your introductory period while the second number represents how often your rate will change when the introductory period is over. Click here to learn more about ARM benefits. Try out this fixed-rate vs. ARM calculator to see what the difference between the two options could be for your situation.
- Government-backed loans – Loans from the FHA, VA and USDA are mortgage options that can help homebuyers finance their home purchase. While some may offer 30-year fixed rate options, they also offer mortgages with lower terms. For example, an FHA loan also has 15-, 20-, and 25-year fixed rate options.
MYTH #5 – ALL LENDERS ARE THE SAME
While lenders may offer similar mortgages, they are definitely not all the same. Just look at PrimeLending. With more than 35 years specializing in mortgage lending, we have a catalogue of over 400 loan programs that fit nearly every borrower and budget. Plus, our award-winning technology3 has streamlined and simplified the entire mortgage process from application through closing.
In today’s housing market, having the right mortgage professional by your side makes all the difference. Our mortgage experts are members of your community but are backed by the national lending power of PrimeLending. From Alaska to Florida and from Maine to Hawaii, there are PrimeLending loan officers serving communities in all 50 states. With their local expertise and our national lending strength, you will have all the support you need to confidently buy your next home.
Now you know what it can really take to get a mortgage, you can shop for your new home with confidence. But, even the most prepared homebuyers may still have questions. Your local PrimeLending loan officer is always available to help guide you through your mortgage process. Connect with them today to get started.
1Down payment waiver is based on VA eligibility.
2Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.
32022 Best-in-Class Lender Award – Online Tools, MortgageCX (3/22); 2022 Best-in-Class Lender Award – Application Process, MortgageCX (3/22)
