Preparing to buy a home: myths and truths
Myth: You need a 20 percent down payment
There’s an array of loan options that don’t require 20 percent down, says Garcia.
That’s a good thing. For many consumers, that number can delay their homebuying dreams for years.
There are many programs for first-time homebuyers, especially from the Federal Housing Administration (FHA) and Veterans Affairs (VA). So speak to your mortgage banker about some programs.
Myth: Put down as much as you can to lower your monthly mortgage payment
Saving for a big down payment is advantageous but you also do not want to deplete your savings, says Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan. His recommendation: Save as much cash as possible for unexpected expenses.
Foguth says, “You shouldn’t overextend yourself. If you use all your cash, you could end up short on your mortgage payment.”
Myth: Save money by bypassing the real estate agent or mortgage broker
While that could prove true in some cases, rarely does the homebuying process go so smoothly that you couldn’t benefit from expert input, says Foguth. That could include a bad inspection report, a low appraisal, or discovering liens against the home.
“Hire a professional and negotiate a fee. Don’t try to do it on your own and think it will be a breeze,” Foguth adds.
Myth: If you get a pre-qualification, you will be approved for a mortgage
Loan approval involves an underwriter sifting through hundreds of pages of documentation, as well as considering other factors like the home appraisal report. A pre-qualification letter, however, is based on a quick, preliminary analysis of your credit report, Garcia says.
Getting the letter is a recommended early step to show you’re a serious buyer, but it doesn’t mean a loan approval is guaranteed.
Myth: Credit score damage will crush your home dreams
Although it might not be ideal, many borrowers are able to secure a home loan even with not-so-stellar credit, especially if they have a significant down payment and strong income.
Garcia notes that your interest rate will likely be higher since the lender is taking a bigger risk on you.
Truth: Finding a new home takes time
46 days is the average time it takes to close on mortgage loan applications.
In other words, don’t count on finding and closing on a home before your rental lease ends next month.
Truth: Once you find a home, be prepared to move quickly
46 percent of homes sold in August were on the market for less than one month.
Garcia says, “People who casually go out and find something that’s perfect, but who aren’t really ready, find themselves scrambling.”
Truth: Small savings add up over time
The difference between a 3.5 and a 4 percent mortgage interest rate equals thousands of dollars over 30 years.
In the months leading up to buying a home, work hard on improving your credit, since the better your credit score, the better the interest rate will be on your loan. Some credit score-boosting strategies to try:
- Pay down credit card balances
- Correct errors that may be on your credit reports
- Don’t open new credit lines
- Maintain a clean payment history
The people who have the best homebuying experience are the ones who educate and prepare themselves and take the process seriously, says Garcia. Work with professionals who can help separate myths from truths, and you’ll be opening the door to your new home in no time.