You’ve decided to buy a home. Friends, family, even coworkers and random acquaintances are offering their advice. Not all of it will be true.
They mean well, but what worked for someone else may not be the best option for you. Plus, there are plenty of widely believed myths surrounding home buying. Falling for them can actually make it harder to find the right place.
Here are some of the most common myths and why you shouldn’t believe them.
Myth #1: You need a 20% down payment
This myth can stop potential homebuyers cold. The median listing price in the U.S. is $385,000. You would have to have $77,000 readily available if you wanted to make a 20% down payment, an amount that can be daunting for a lot of people.
“It’s one of the biggest myths out there,” says John Mallett, founder of mortgage broker MainStreet Mortgage. “It stops more people from entering the market or even seeing if they can qualify.”
In reality, 20% down is more of a guideline than a hard and fast rule. In fact, the average down payment equals 12%. For first-time buyers it goes down to 7%.
Government-backed options, such as FHA loans and USDA loans, can be secured with as little as 3.5% down. If you are a member of the armed forces or a veteran and you qualify for a VA loan, you can buy a home with 0% down.
Conventional loans also don’t require a 20% down payment, but with less money down you will generally need to pay for private mortgage insurance. PMI costs 0.5% to 1% of your loan amount per year and is paid in monthly installments. So, if you have the money to pay 20% down, however, it can make sense to do it. Having more equity also protects you if home values fall.
You can also apply for a number of different grants and homebuyer assistance programs that can provide money for a down payment. These programs can include grants, forgivable loans and second mortgages that can provide partial or full down payment help. (Brokerage Redfin has put together a list of down payment assistance programs available nationwide and by state.)
Myth #2: You should definitely get a 30-year fixed-rate mortgage
The 30-year fixed-rate mortgage is popular for a reason. The fixed rate means predictable payments, while the long payback period means relatively low payments.
However, it’s not your only option and it pays to evaluate different types of loans to see which one best fits your needs. In many instances, a 30-year mortgage will be more expensive in the long run.
For example, if you are more interested in paying the mortgage off faster and can afford higher monthly payments, you might want to consider a 15-year fixed-rate loan.
These loans will usually have lower interest rates than 30-year loans (the average rate for a 15-year mortgage has been below 2.5% since last summer). By paying a lower interest rate over a shorter term, you’ll save money despite higher monthly payments.
An adjustable-rate mortgage may be worth considering if you don’t plan on staying in the home for long. Some ARMs will have very low interest rates during the initial fixed-rate period, which can save money. Though if you do not sell or refinance before the rate becomes variable, you could face a much higher rate and monthly payments.
Myth #3: You can’t buy a home unless you have great credit
Sometimes, even buyers with good credit scores may be hesitant to apply for a mortgage because they don’t think they’ll qualify.
While having a good credit score will allow you to qualify for better mortgage rates, having less than spectacular credit doesn’t mean you won’t qualify at all. Different lenders will have different minimum credit score requirements, but in general you can get a conventional mortgage with a credit score as low as 620.
You have other options if your score is lower than 620. FHA loans, for example, will technically require a minimum of only 500, although you will likely have to make a larger down payment and your interest rate won’t be the best. A 580 credit score is more commonly acceptable and still allows you to make a relatively low down payment.
The bottom line? The higher your credit score the more favorable the rate you are likely to qualify for, which can save you a lot of money. But if you don’t have perfect credit, there are still ways to become a homeowner.
Myth #4: You can’t buy a home if you have student loans
The fact that you have student loan debt doesn’t automatically disqualify you from obtaining a home loan either. What matters is whether or not you have enough income to cover your student loans, mortgage payments and other debts.
This means that you’re going to have to take a good look at your debt-to-income ratio. Your DTI represents how much of your monthly income goes toward paying debts. You can calculate your DTI by taking your monthly debt expenses and dividing them by your gross monthly income.
A general rule of thumb used by most lenders for an ideal DTI is 28%/36%, where 28% of your monthly income goes towards paying all your monthly debt expenses without including your mortgage payment and 36% is the maximum including the mortgage. Some lenders, however, will accept higher DTIs.
In fact, if your DTI is within a lender’s acceptable limits and you’ve been paying your student loan on time, your good payment history can help you qualify for a mortgage.
If your DTI is too high, however, you may not be able to qualify. To fix that, you can look into programs that offer student loan payment assistance to help reduce your debt. There are other steps you can take to make the home buying process successful.
The FHA has also recently eased its requirement for how student loans payments are calculated when determining a borrower’s monthly obligations. The new policy is based on the actual payments made rather than a percentage of the outstanding loan balance. The change will make it easier for those with student loans to qualify for an FHA loan.
Myth #5: You don’t need a home inspection
In today’s hot housing market, some buyers have taken to waiving home inspections to win bidding wars. While this tactic may help you win the battle with other potential buyers, it comes with a high level of risk as well.
Many lenders require a home inspection before you buy, but some lenders don’t. Even if your lender makes a home inspection optional, it’s a bad idea to waive it.
Home inspections are designed to identify potential problems in a home. They can uncover things as simple as stuck windows and plumbing leaks to cracked foundations and black mold infestations.
As a buyer, you want to be aware of problems with the home so you can either negotiate for repairs to be made as a condition of the purchase or walk away from a home that may be unsafe or damaged beyond repair.
Myth #6: You only need to budget for a down payment and closing costs
Most homebuyers are well aware that they’ll need money upfront for their down payment and closing costs. However, these aren’t the only early costs you need to think of when you purchase a home.
Buying a home is a big expense, so you want to protect it by getting homeowners insurance to cover potential damages to the property, loss of personal belongings and medical care for visitors in the event of an accident on your property.
In fact, your mortgage lender will require you to have a policy in place by closing. You should get estimates for insurance costs and budget accordingly early in the buying process. Costs will vary depending on your home’s value, location, condition, the type of coverage and many other factors. However, the average cost for insurance is about $2,300 per year.
You’ll also want to budget for property taxes, homeowners association fees and trash pick-up fees, if applicable. These are items you should take into consideration when calculating the total cost of buying a home.
Finally, when you buy a home, you have to move into it. While some new homeowners are ready to pack up their belongings, rent a truck and move themselves, for others a move involves hiring professionals to handle the whole process. Get estimates from different companies and make sure to factor the costs into your home buying budget.
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