4 Myths and Facts About the Home Buying Process
Anthony Gilbert // March 21, 2018
The world of new home buying can be full of complications and misunderstandings. People who bought homes decades ago might give financial advice to friends and relatives that is simply incorrect. How can buyers tell which is true, and which is a myth? The answers to these common myths help borrowers understand what they really need to get a mortgage loan.
Myth 1: Pre-qualifying and Pre-approval Are the Same Thing
Some websites use the term “pre-qualification” and “pre-approval” interchangeably, so it is not surprising that some home buyers think they mean the same thing. In truth, pre-qualifying is something that people might even be able to do on their own, while mortgage pre-approval requires a fair amount of research on the part of the lender. Anyone can enter in their income, credit scores, debts, and other expenses to determine how much they might be qualified to get in a mortgage. To secure pre-approval, the buyer has to provide clear and acceptable evidence of all of these factors. Pre-approval means the lender has determined they would likely approve the buyer for a loan up to a certain amount, based on that information.
Myth 2: Everyone Needs a 20% Down Payment
For many years, people have operated under the standard assumption that a 20 percent down payment is the ideal option. While this is technically true, the idea that 20 percent is the minimum that lenders will consider is not factual. There are many mortgage loans with low down payments available to borrowers who meet certain demographics. Some can be as low as 3-3.5 percent, and special programs will even allow buyers to get a new home with no down payment at all. Many of these loans come with higher restrictions on income, credit, and total debts. Buyers should confirm that they understand the terms before applying for a loan.
Myth 3: Only Very Good Credit Scores Will Qualify
Credit scores based on the Fair Isaac Corp. (FICO) range from 300-850. People who have median scores at 740 or above are considered to have “very good” credit. Although people with these kinds of credit scores often receive the best offers for mortgages and the most favorable terms on loans, they are hardly the only ones who can qualify. Fannie Mae and Freddie Mac both have conventional loan terms for people with credit scores as low as 620. The Federal Housing Administration (FHA) will guarantee loans to borrowers with a score of 500 or higher. People with credit scores on the lower end should keep in mind that they may not get the lowest interest rates. They may need to make a higher down payment or prove that they have more assets in reserve.
Myth 4: A 30-Year Fixed-Rate Mortgage Is Always Best
When people do a brief search for mortgage interest rates, they might notice that the 30-year fixed-rate mortgage is often considered the standard. Many financial experts will recommend this loan, due to its broad accessibility for a wide range of potential borrowers. However, there are other types of loans that applicants should consider when buying a new home if it meets their needs. For example, they might prefer a fixed-rate loan with a 20-year or 15-year term, so they can pay off the loan more quickly. In a period where interest rates are expected to remain fairly stable for a longer period of time, an adjustable-rate mortgage might offer the flexibility and lower initial payments that certain buyers are looking for.
Searching for a new home is a big decision, and there is a lot of information out there. If buyers can sort out the myths from the facts, they can better determine what the home buying process will be like for them.
Anthony Gilbert is the owner of The RealFX Group. Anthony specializes in real estate, real estate marketing, managing the team and achieving set goals.