6 Common Mortgage Loan Myths
Applying for a Mortgage can often feel overwhelming, especially for first-time homebuyers who are completely new to the process. Confusing and conflicting information can leave many borrowers reluctant to even start the process at all.
In efforts to provide more clarity, we’ve debunked 6 common mortgage loan myths below!
- 20% down payment required. It is a common belief of many potential homebuyers, that no matter the type of loan you are applying for, you will be required to put up a 20% down payment. This information is harmful because it is not true and can deter a lot of people from even considering applying for a mortgage, who are sure they don’t have the appropriate amount of funds.
Borrowers who are unable to come up with a 20% down payment can still be eligible for a loan when they get Private Mortgage Insurance or PMI. An added expense on your monthly payments, PMI provides protection to the lender in the case that the borrower defaults on his or her loan.
This type of insurance is a common requirement for some Conventional or FHA loans with down payments as low as 3-5%. Keep in mind that once you own 20% equity in your home, you can cancel your private mortgage insurance and continue to make your mortgage payments without the extra expense.
- Pre-qualification is the same thing as pre-approval. This common misconception is important to clear up, as both pre-qualification and pre-approval are extremely helpful to the home-buying process and both play an important role.
Pre-qualification is an estimation of the amount of money you can borrow, based on your current finances and credit score. It provides insight as to which loan option is best for you.
Pre-approval is a more in-depth examination of your finances, including a credit check, that results in a written commitment from your lender of the maximum amount of money they can lend you.
For more on the benefits of getting pre-approved along with our pre-approval document checklist, visit our pre-qualification vs. pre-approval page here.
- Your down payment covers the closing costs. The down payment is usually one of the first expenses that a potential homebuyer will begin saving for. This makes sense because it is usually one of the largest upfront expenses you will have. However, when saving for your down payment, it is important to keep in mind that it does not cover your closing costs.
Closing costs are a separate expense that covers your processing fees, like the appraisal and title insurance, and usually range between 3% – 6% of the total balance of your loan.
For more information on Costs to Consider, refer to our article here.
- You must have perfect credit. Many people are under the impression that your credit must be perfect before even considering purchasing a new home. Though lenders are looking for borrowers with good credit scores, there are many options for those who have less than perfect credit.
One option for borrowers who find themselves in this category is to consider applying for an FHA loan. Insured by the government, this type of loan is perfect for those who may not meet the qualification factors required for a traditional conventional loan program.
It is also important to keep in mind that there are many steps you can take to work towards building good credit. For more on this, reference our guide on Credit Clean Up Tips.
- Applying for a mortgage will hurt your credit. While it is true that applying for any new type of loan or line of credit will harm your credit, it will only do so temporarily. This is the same in the case of applying for a mortgage. However, it is likely that you won’t see this temporary hit to your credit until after you’ve already been pre-approved.
If you are trying to avoid any harm to your credit during this time, it is a good idea to refrain from opening any unnecessary lines of credit.
- You can’t be in debt and buy a home. If this myth were true, most homeowners would not be in their homes today. Debt, in many forms, is common amongst many Americans, whether they are in the process of paying off a student loan or currently making payments on a car. And neither of these things should stop you from owning a home.
The important number to consider here is your debt-to-income ratio. This number shows the percentage of your monthly income that goes towards debt payments and reoccurring expenses. The higher your debt-to-income ratio, the riskier you are as a borrower. Therefore, you want a low debt-to-income ratio when applying for a mortgage loan.
If you find yourself in a higher debt-to-income ratio category, consider paying down your debt or finding a way to generate more income. Both of these solutions will help you get started on a path towards a lower debt-to-income ratio and open more opportunities for you to buy a home.