For many, owning a home is part of the American dream, but it’s easy to feel anxious about making the leap to buy one. There’s a lot of confusion from how much of a down payment you need saved to what types of mortgages are best. Maybe this causes you to think it’s not financially your time, or just more trouble than it’s worth. Let’s set the record straight and separate fact from fiction!
Myth No. 1: Find the Right House First
Plenty of people immediately want to start searching Zillow listings or scheduling visits to view houses. Stop right there! Even if you think you’re just browsing, you run the risk of falling in love with a house, only to find out it’s out of your financial range. The first step for every potential homebuyer is to identify your budget. Of course, browsing houses is fun, but you need to do your homework first. Make sure your credit score is in order along with getting pre-approved to determine your house shopping budget!
Myth No. 2: Your Down Payment Must be 20%
A 20% down payment is ideal if you want to avoid that pesky private mortgage insurance or PMI. But you do have other down payment options. For qualifying buyers, lenders can offer mortgage options with 10% or 5% down—if you’re willing to pay the monthly PMI cost. You can even skip the conventional loan and go for a Federal Housing Administration or FHA loan with only 3.5% down if you qualify. If you choose to buy in a more rural area, you might qualify for a USDA loan, which requires no down payment. Don’t forget about VA loans if you have served in the military!
Myth No. 3: The Only Up-Front Cost is the Down Payment
Many people mistakenly believe the down payment is the only cost they need to worry about when buying a home. However, it’s more than just the price tag on a house, and it involves additional costs like private mortgage insurance, closing costs, property taxes, etc. And then there’s the home inspection! Even though a home may look perfect on the surface, it could secretly have problems that are hard for the average eye to spot. Some buyers skip this step to save on the cost, but it’s worth the time and money.
Myth No. 4: Debt Prevents You from Getting a Mortgage
Just because you have debt you are working to pay off doesn’t mean you cannot get approval for a home loan. Lenders will look at your debt-to-income ratio or DTI to determine your ability to make monthly payments on the new mortgage. Your DTI is measured by dividing your monthly debt payments like student loans, car loans, credit card bills, etc. by the amount of your monthly income. The lower the number, the better your chances of qualifying for a mortgage.
Myth No. 5: A 30-year Fixed Mortgage is the Best Option
Most people choose a 30-year fixed-rate mortgage because they know their monthly payments will be lower than the 15-year option. However, they will end up paying more during the life of the loan with the 30-year option because they are borrowing the same amount of money for twice as long. The 30-year mortgage is still a great choice for some buyers – just keep an open mind towards other loan plans, including adjustable-rate mortgages.