There are plenty of misconceptions when it comes to securing a loan for your home. Below are the top 5 myths about getting a mortgage.
Myth: You need 20% down to buy a home
Larger down payments have advantages, such as better interest rates and avoiding Private Mortgage Insurance (PMI). However, having 20% is not a requirement for securing a home loan. Mortgage brokers and lenders prefer 20% down since it lowers their lending risk.
According to the National Association of Realtors, the average down payment on condos was 12%. For homeowners under age 30, the average sits at 6%. If you qualify for government-backed loans your required down payment will be even lower. FHA requires only 3.5% and VA-backed loans require no down payment at all.
Myth: Pre-qualification is the same thing as pre-approval
During a mortgage pre-qualification, a borrower answers questions regarding their financial situation. In order to be pre-approved, the lender must verify the information that the borrower has provided. In case false information arises, most sellers (and agents) will require a pre-approval over a pre-qualification letter from the lender.
Myth: You need perfect credit to get a mortgage
Credit is only one of the many things lenders look for when determining if you qualify for a home loan. They also look out for debt-to-ratio income, down payment, income, and savings.
There are programs and loans for borrowers with lower credit scores. Loans backed by FHA only require a score of 580 and most conventional loans require 620.
Myth: A 30-year fixed rate mortgage is always the best
You should pick a mortgage based on your situation.
A 30-year fixed-rate mortgage might be appealing to first-time homeowners. It is consistent with lower monthly payments and longer payback periods.
A 15-year fixed-rate mortgage is a good option for those who can afford a higher mortgage payment and often come with a lower interest rate.
An adjustable rate mortgage is fixed for a period of time before the interest rate readjusts to a higher percentage. This is ideal for homeowners who intend to sell their home fairly quickly.
Myth: All mortgage brokers and lenders are the same
Just like choosing a real estate agent, it is important to make sure you are picking the right mortgage broker or lender who works with your needs.
There are differences between a mortgage broker and a lender. It is advisable to shop around to see which fits your needs and can secure you the best rates based on your financial situation.