For some, the mortgage process can be a confusing part of the home buying journey. There are multiple mortgage myths about credit scores, down payments, and debt that buyers will come across when shopping for a mortgage, which makes it harder for home shoppers to tell what is accurate from what is not. According to this Forbes article by Tara Mastroeni, there are 6 common mortgage myths that buyers should ignore.
Getting a mortgage can be a mystifying process, especially if you’ve never done it before. To make matters worse, there’s a lot of incorrect and outdated information out there to contend with. To that end, we’ve decided to set the record straight. Below are six of the most common mortgage myths. We’ve debunked them for you so that you can go into the mortgage process feeling informed.
Getting pre-qualified is the same as getting pre-approved
Though these two terms may sound the same, there is a world of difference between them. You can get pre-qualified in minutes just by answering a few questions about your financial situation. However, the pre-approval process is much more through. In this scenario, your financials are vetted by a lender before a decision is made. If you’re approved, you’re given a maximum loan amount based on how much the bank is willing to loan you.
These days, a pre-qualification isn’t worth much. Sellers, by and large, prefer a pre-approval since that’s a much more accurate representation of your ability to actually buy the home. When getting ready to purchase a home, make sure you get pre-approved and leave the pre-qualification behind.
Shopping around for lenders will hurt your credit score
While it’s true that multiple inquiries on your credit can lower your score, not all inquiries are created equal. FICO allows for rate shopping by counting all similar inquiries made within the same 30-day period as one. This means you can visit as many lenders as you’d like as long as it all happens within 30 calendar days.
And, you should shop around. Getting the best interest rate possible is important when it comes to buying a home. Even a fraction of a percentage point makes a big difference. It could mean thousands of dollars spent or saved over the life of the loan. Conventional wisdom states you should visit at least three lenders before making your final determination.
You need perfect credit to buy a house
Your credit may not be spotless, but that doesn’t mean you can’t buy a home. These days, while conventional loans require a score of at least 620, loans backed by the Federal Housing Administration (FHA) only require a score of 580 for approval. Beyond that, there are options like finding a co-signer or agreeing to make a bigger down payment that can help reassure your lender.
That said, the interest rate that you’ll pay on the loan is also determined by your score. Therefore, you’ll end up saving in the long run if you make sure your credit is in the best possible shape before you buy. You can raise your score by making sure to make your payments on time every month and paying as far above the minimum payment as possible.
You can’t be in debt and buy a home
Yes, debt will impact your ability to buy a home. However, with the vast majority of people carrying things like student loan debt and car payments, it would be unrealistic to assume that everyone who goes to buy a home will be debt-free. Instead, what matters is how much debt you’re carrying relative to your total income.
When mortgage companies decide whether or not to approve you for a loan, they look at something called your debt-to-income ratio. This is found by taking the sum total of your recurring monthly debts and dividing it by your total monthly income. Ideally, in order to be approved for a loan, your ratio will be less than or equal to 36%.
If your current debt-to-income ratio is too high to be approved at the moment, you have two choices. You can either work to pay down some of your debts or find ways to generate more income. Don’t be afraid to talk to a lender about which solutions will have the biggest impact.
You need to put 20% down
There was a time when putting 20% down was the gold standard when buying a home. However, those days have come and gone. In today’s market, most loans require less than 6% down. In fact, most FHA loans only require as little as 3.5% down and, if you qualify, loan programs through the Veteran’s Administration (VA) often don’t require any money down at all.
Continue reading the full article HERE.