For many people, buying a home is one of the most significant financial investments that they will have in their lifetime.
In 2019, the average price for a new home in the USA was around $383,000, which is significant for most people.
Since most people can’t pay cash upfront, they need to take out a mortgage to afford the cost.
However, the problem is that the concept of mortgages is difficult for many first-time homebuyers and homeowners to understand.
We might even argue that the process of getting a mortgage is made difficult on purpose. And that results in homeowners paying more money than they should have.
There are so many home buying myths around that it can be challenging figuring out what is true.
Don’t worry, though! We’re here to act as your mortgage myth busters to help you find out the facts about home buying.
Here are ten of the most common misconceptions about mortgages and the truth behind them.
Pre-Qualified Is the Same as Pre-Approved
Many first time home buyers make the mistake of conflating being pre-qualified and being pre-approved. We can’t fault them.
Some unscrupulous lenders go out of their way to make these two concepts sound the same.
However, for getting a mortgage, there is a world of difference between being pre-qualified and being pre-approved.
You can get pre-qualified in minutes if you answer a few basic questions about your financial situation.
However, being pre-qualified does not mean much for either sellers or reputable lenders.
Being pre-approved is a much more thorough vetting process and will count significantly more towards whether you are a suitable candidate for a mortgage.
Getting Pre-Qualified Means You Will be Guaranteed the Loan Amount
People get pre-qualified for a mortgage because the process is faster, and you will get an idea of what your loan amount would be.
However, it is essential to note that you will not be officially eligible to get that amount at this stage.
It is only during the pre-approval stage when banks will take a deep dive into your finances.
They will check if you will be better qualified for a particular loan amount from the bank. Even then, lenders still reserve the right to recheck your credit before the mortgage is finalized.
Any additional negative information about your financial information could still affect or even nullify your pre-approval status.
The bottom line is that, until the mortgage deal is closed, you won’t have a substantial amount.
The Only Acceptable Down Payment is 20% of the Total Price
One of the most prevailing home selling myths is that sellers will only accept 20% of their home’s total asking price.
While this might have been true in the past, most loan agreements will only require around 6% of the asking price as a qualified down payment.
Many Federal Housing Administration (FHA) loans only require around 3.5%.
What’s more, if you qualify for a loan program through programs such as the Veteran’s Administration, you might not even be required to make a down payment at all.
The Down Payment Is The Only Out-of-Pocket Expense You Should Worry About
Another common (and costly) mistake that many first-time homebuyers make is thinking that the down payment is the only upfront cost.
That means that they don’t consider closing costs, which are the charges placed by the lender and buyer to facilitate the transaction.
These costs will amount to around 1–2% of the asking price.
To avoid getting shocked by these “hidden fees,” make sure to ask your lender if they will charge these closing costs to you or if they will roll it into your mortgage.
Shopping Around For Other Lenders While Applying for a Mortgage Will Damage My Credit Score
While it might feel disingenuous, it is financially-savvy to shop around while applying for a mortgage.
Allowing different lenders to pull your credit scores is expected during your mortgage application period.
However, if you apply for another type of loan, such as a personal or car loan, during this 30-day period, you will risk damaging your credit score.
I Can Only Stick with My Current Lender If I Need Refinancing Services
Your current lender will probably tell you that they will give you the best rates because you’re already working with them, but this is one of those refinance misconceptions used to mislead buyers.
You should always check the market to see whether another lender can give you better rates than the ones you have now.
What’s more, you can use your current rates as leverage! Many lenders would be happy to go down lower if they can close the deal with you.
I Should Pay Off My Mortgage As Early As Possible
We know it sounds like a good idea, which is why many first-time homebuyers rush to pay off their mortgage ahead of time.
However, the only thing that you will be doing is lowering your mortgage balance.
In the long run, lowering your principal does not necessarily equate to instant equity.
You might be better off using your extra money to invest in a new business or even putting the money towards savings.
I Won’t Qualify For a Mortgage Unless I Have a Perfect Credit Score
Even if you don’t have a spotless credit score, you can still qualify for a mortgage if you have a score of at least 620.
What’s more, FHA loans can be approved for scores as low as 580.
However, it is still better to get the best possible credit score before applying for a mortgage.
All Lenders Are Legally Obligated to Charge the Same Fees for Their Services
This might be a simple mortgage myth, but one that results from laziness more than anything else.
Don’t assume that all lenders you encounter will charge the same fees for their services. They are not required by law to offer the same rates.
Again, you can avoid paying too much by doing your due diligence and shopping around before committing with a particular lender.
A Reverse Mortgage is Never a Good Idea
On the surface, we know that a reverse mortgage sounds scary.
Why would you want to place your home as collateral and risk losing it in the future? However, there might be times when a reverse mortgage can be helpful.
For example, you become ill and need a large sum of money for your medical bills. Placing a reverse mortgage on your home can help you access a lump sum of cash quickly.
On that note, you should still be careful and consider whether getting a reverse mortgage is your only option.
Ensure that you are aware of all the terms in the reverse mortgage and plan on how to repay the loan payments down the road.
Be an Informed Home Buyer and Home Owner
Knowing the truth behind these common mortgage myths is your responsibility as an informed home buyer and homeowner. Knowing the truth is an excellent way to avoid mortgage fraud schemes as well as overpaying for your home.
Here at Spirit Funding, we want to help you find the best mortgage plan for you by giving you the tools to be a savvy home buyer. If you have any more questions about other mortgage myths, we’ll be happy to help you with them.
Frequently Asked Questions
Do I need a 20% down payment to buy a home?
No. While a 20% down payment eliminates the need for private mortgage insurance (PMI), many loan programs accept significantly less. FHA loans require as little as 3.5% down, and some VA and USDA loans require zero down payment. The 20% requirement is one of the most common mortgage misconceptions that prevents qualified buyers from pursuing homeownership.
Will shopping around for mortgage rates hurt my credit score?
No. Credit scoring models like FICO recognize rate shopping as responsible borrower behavior. Multiple mortgage inquiries made within a 14 to 45-day window are grouped and counted as a single hard inquiry. You should compare offers from at least three lenders to find the best rate and terms.
Can I get a mortgage with a credit score below 700?
Yes. You do not need a perfect credit score to qualify for a mortgage. Conventional loans typically require a minimum score of 620, while FHA loans may accept scores as low as 580 with a 3.5% down payment. Some lenders offer options for borrowers with scores in the 500 range with a higher down payment.
Is pre-qualification the same as pre-approval for a mortgage?
No, they are different. Pre-qualification is an informal estimate based on self-reported financial information. Pre-approval is a more rigorous process where the lender verifies your income, assets, debts, and credit history. A pre-approval letter carries much more weight with sellers because it shows the lender has already reviewed your finances.
Should I always pay off my mortgage as early as possible?
Not necessarily. While paying off your mortgage early saves you interest over the life of the loan, it is not always the best financial decision. If your mortgage interest rate is low, you may earn more by investing extra funds in the stock market or retirement accounts. Consider your full financial picture, including emergency savings and higher interest debts, before making extra mortgage payments.
