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It’s fall, which means it’s the perfect time for s’mores, sweaters, and scary stories. There are some common misunderstandings about getting a home loan that can make even the savviest of home buyers feel spooked. So, gather ‘round the virtual bonfire as I tell you the tale of “spooky” mortgage myths perfect for debunking.
1. Qualifying for a mortgage is the same thing as getting approved
A mortgage qualification1 (sometimes called a “pre-approval”) is a great first step in the homebuying process. However, contrary to what some people may think, qualifying for a mortgage is not the same thing as getting approved2 for a mortgage. Approval is a step above qualification and takes a little longer.
- Mortgage qualification — Based on initial information you provide on your credit, income, assets, and debts. The loan is NOT approved by an underwriter.
- Mortgage approval — An underwriter has reviewed your income, credit, and debt information which is then verified and approved.
While qualifying and being approved for a mortgage are two separate things, it is still worthwhile to get qualified for a mortgage before you house hunt. Why? Because it can help you narrow down your home search and shows the seller you are a serious buyer. If you want to know how much home you could afford before you get qualified, try this free home affordability calculator.
2. You have to have 20% down to buy a home
It’s time to say R.I.P to the myth that you have to make a 20% down payment to buy a home. Legend has it that banks used to require a 20% down payment on home loans as a way to protect themselves. Today, some homebuyers need more flexibility when it comes to down payment requirements.
To help make down payments more feasible for most income levels, there are low and even no down payment loan options available. These include:
- FHA loan — Requiring as little as 3.5% down, an FHA loan is backed by the Federal Housing Administration. It also offers flexible income and credit requirements, plus lower closing costs.
- VA loan — Partially guaranteed by the U.S. Department of Veterans Affairs, VA loans help make homeownership affordable for active-duty military members, veterans, and qualifying spouses. In addition to no down payment requirements3, VA loans have benefits like higher loan values and no private mortgage insurance.
- USDA loans — The U.S. Department of Agriculture (USDA) isn’t just about food. A USDA home loan offers borrowers in qualified rural and suburban areas a mortgage option that requires zero down payment, lower standard interest rates, and flexible credit requirements.
Down payment assistance programs4 are another viable option for many homebuyers that may not be able to put down 20% to buy a home. Some programs, like Home Possible® from Freddie Mac and HomeReady® by Fannie Mae could require as little as 3% down for borrowers who qualify. Keep in mind that borrowers maybe be required to get private mortgage insurance (PMI) if they cannot make a 20% down payment, depending on their loan program.
3. A fixed-rate mortgage is your only option
Let’s put another mortgage myth to rest: fixed-rate mortgages are your only option. Simply not true. There’s more than one way to tell a ghost story and there is definitely more than one way to pay for your house. Sure, 30-year fixed-rate mortgages are popular because the interest rate doesn’t change, but they aren’t your only option.
Typically, 30-year fixed-rate mortgages offer predictable monthly payments and a lower payment over the life of the loan. But, if you plan to move in the near future or want to potentially pay less in interest over time, an adjustable-rate mortgage or fixed-rate mortgage with shorter terms may be alternative options.
- 15-year fixed-rate mortgage — With a shorter term, the payments on a 15-year fixed mortgage may be higher than a 30-year fixed. However, borrowers could expect to pay less in interest over the life of the loan since the loan term is shorter.
- Adjustable-rate mortgage (ARM) — An ARM usually has a lower initial interest rate than a fixed-rate mortgage but that is due, in part, to the fact that interest rates on an ARM change when the introductory period ends. For example, a 7/6 ARM means that your introductory rate will last for seven years and, when it ends, the rate could adjust according to the market rate every 6 months.
Check out this free fixed rate vs. ARM calculator to discover if a fixed-rate mortgage or ARM works best for your homebuying plans.
4. You must be debt-free
Is it a good idea to try to ditch your existing debt before buying a house? Yes. Do you have to? No. It’s more about finding the right mortgage for your financial situation rather than worrying about being totally debt free before trying to reach your home goals. In fact, having debt and paying it down in a timely manner can help build a credit score. What lenders really care about is how your debt compares to your income.
When you apply for a mortgage, an underwriter will look at your debt-to-income ratio (DTI) which is all of your monthly debts—think student loans, car payment, credit card debt, etc.—divided by your gross monthly income.
Depending on your lender and what type of mortgage you need, it is best to aim for DTI of 43% or lower. With a lower DTI score, borrowers could get additional mortgage benefits and more home loan program options.
5. No means no when it comes to a mortgage
With a catalogue of more than 400 home loan options to pull from, PrimeLending has more solutions that may work for you, even if another lender said “no.” Our loan officers across the country are always available to take a second look and offer you alternative mortgage options that better fit your unique situation.
And so ends our tales of mortgage myths, freshly debunked to help you buy your next home with confidence. Have more questions? Have more questions? Start a conversation with your local PrimeLending loan officer today!
1All loans subject to credit approval. A qualification is not an approval of credit and does not signify that underwriting requirements have been met. Conditions and restrictions may apply.
2All loans subject to final credit approval and acceptable property. Conditions and restrictions may apply.
3Down payment waiver is based on VA eligibility.
4Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.
