Buying a Home

10 Mortgage Myths Debunked: What to Know Before Getting a Mortgage

Sep 6, 2018, 1:46 PM | Logan Arey
Man receiving keys to his new home after getting a mortgage

Let's be honest, myths can certainly warp reality no matter what category they fit into. And debunking them helps provide us with clarity. It's essentially wiping false information from our brains and giving us a new perspective.

That's why we're debunking 10 of the worst mortgage myths. We want to give you some clarity so you can make the best decision when it comes to getting a mortgage.

1. You're Guaranteed a Loan When You're Pre-Qualified

If you get a pre-qualified loan amount, it means that lenders have only taken your basic information. They haven't gotten into the nuts-and-bolts of your finances, so you can't assume you'll secure that projected loan amount.

A pre-qualified loan amount is only designed to give you an idea of what you might be able to qualify for when you do apply for a mortgage.

If you want a better projection and a better chance of securing a loan, instead of getting pre-qualified, you'll actually want to go through the pre-approval process.

In the pre-approval process, your lender will look into your earnings history, contact your employer, verify your credit report, and factor in your debt-to-income ratio to come up with an exact loan amount and an idea on the interest rate you'll be paying.

It's very important to note that a pre-approval is also not 100% set in stone. It is, however, a huge step in securing a mortgage.

2. You Need a 20% Down Payment

The standard way of thinking is that you need to make a 20% down payment in order to get a mortgage. While making a large down payment is good, it isn't feasible for most first-time homebuyers.

The main benefit to putting 20% down is that, by doing so, you won't have to pay private mortgage insurance (PMI).

But there are many options out there for borrowers who can't pay that 20%. FHA loans will allow a down payment of 3.5%, and even conventional loans will allow some borrowers to put down as little as 3%.

Have you served in the military? Guess what! There is no required down payment for VA loans, which means you don't have to put any money down. That's one of the many great benefits of a VA loan.

Talk to multiple lenders to see what options are available to you because you're down payment isn't the deciding factor to obtaining a mortgage.

3. You Can't Have a Bad Credit Score

Much like the 20% down payment, most potential borrows think they need a stellar credit score to get a mortgage. Having a subpar score won't keep you from getting a loan. However, what is true about good credit scores is they'll offer you great interest rates.

But there's a little bit more behind your credit score than just the score itself. Lenders will analyze your whole credit history to see if you're making payments in a timely fashion and to see if you can take on more debt.

Here's an example: If you have a score of 580, but you're demonstrating good financial responsibility (making your payments on time), a lender will see that and usually take it into account.

There's also always the option of VA loans, if you've served in the military, and FHA loans. These loan types have lenient credit standards compared to conventional loans. There are options out there so don't let your credit score affect your decision making.

4. A Home Is a Good Investment

You've probably heard this one all the time, but realistically it isn't the investment you might think it is.

Robert Shiller, a real estate expert and author of Irrational Exuberance, found that home prices between 1890–1990 did rise faster than inflation, but the average of that was only 0.21% per year.

Owning a home is still a nice thing and you still build up equity with it, but if you're counting on it to be a good retirement investment, you might be disappointed later.

5. You Should Always Get a 30-Year Mortgage

When it comes to mortgages, the 30-year fixed is the most popular choice for homeowners. But that doesn't mean it's the best choice for you.

If you can afford higher payments, then a 15-year mortgage could be more ideal. Plus you'll pay off your mortgage faster and pay less in interest on the life of the loan.

There's also the option of adjustable rate mortgages (ARMs). You may also hear them referred to as "hybrid ARMs." That's because this loan type usually has a fixed rate for a few years before the adjustable rate kicks in.

If you only plan on staying in your home for a short period of time, then an ARM might be your best choice since your initial fixed-rate period will have a lower interest rate.

6. You Need to Pay Off Your Mortgage as Quick as Possible

It may sound like a good idea to pay off your mortgage as quickly as you can, but hold off on that idea. That extra money you're putting into your mortgage payment might be better off somewhere else like a retirement account with a 6–8% rate.

Or, do you have any other high-interest rate debt, such as a credit card? Then it might be a good idea to use your extra money to pay those off first.

Additionally, as of right now, mortgage interest payments are tax deductible. But, we're not advocating to not pay off your mortgage quick. We just want you to be aware of other options.

7. It's Better to Own a Home Than Rent

The debate between renting vs. buying isn't that simple. Yes, owning a home has advantages such as your home's value appreciating and being able to deduct mortgage interest on your taxes.

But renting has its values too. Renting gives you the ability to relocate easier and you don't have to pay for any maintenance costs or property taxes.

Ultimately, it's up to you and what works best. Just don't feel like you need to purchase a home for appearance sakes.

8. Student Loan Debt Will Prevent You from Buying a Home

Student loan debt is a big issue in the US, and mostly with the younger generation. But there have been some changes specifically making it easier for potential borrowers with student loan debt to get mortgages.

For example, the maximum DTI under Fannie Mae's guidelines was 45%, but it has been increased to 50%.

9. Interest Rate Determines the Cost of a Mortgage

Potential borrowers should be aware that the interest rate isn't a perfect reflection of your total mortgage cost. You need to look at origination fees and, especially, the annual percentage rate (APR).

In short, the APR is the amount of interest paid in a year rather than what's being paid monthly. So when you're comparing lenders, it's important to compare APRs rather than the actual interest rate since lenders will differ in this category.

For example, you see one ad promoting a 3.5% interest rate and another ad promoting a 3.6% APR. At first glance the first one seems like the better deal, but you might not be seeing the whole picture. You would need to do some research on the first one and find out what the APR is before comparing the two lenders.

10. Mortgage Rates Are the Same Everywhere

A lot of people think it doesn't matter where you shop for your mortgage because you'll be getting the same interest rate.

This simply isn't true.

Different lenders offer different rates, and you might be surprised at what deals are offered through different businesses. To make sure you're getting the best deal, you should shop around.

We know it might be easier to stay with your bank and get a mortgage through them, but just because you bank with them doesn't mean you'll get preferential treatment.

Moving Forward with Getting a Mortgage

Have any of these myths held you back from buying a home? If you're ready to jump into homeownership, don't let any of these mortgage myths prevent you.

Are there other myths you've encountered? Let us know in the comments!

And, if you have any more questions or concerns, talk to a mortgage professional. One of our expert loan officers will happily answer your concerns and provide you with options. You can reach us by calling (888) 935-3828 or by visiting us online.

Logan Arey