Blog posted On July 28, 2021
If you don’t think you’d qualify for a mortgage, think again. Many times, home buyers will doubt they can qualify for a home loan based on misinformation. So, to set the record straight, here are five mortgage myths, debunked.
The long-lost tale of the 20%* down payment is one of the biggest modern home buying myths. Though a 20%* down payment can prevent you from paying costly mortgage insurance, it’s not a requirement to buy a home. In fact, the average down payment for most home buyers was 12%*, as of 2019. For first-time home buyers, the average down payment was 7%*. Plus, there are several low-down payment mortgage options that can help you purchase a home with a very small down payment:
You can check out all our loan options on our “Loan Products” page.
More than 80% of home buyers choose the 30-year fixed-rate mortgage. It’s by far the most popular type of mortgage, but it’s not the only type of mortgage that we offer. Many people choose the 30-year fixed-rate mortgage because it offers predictable, consistent, and relatively low monthly payments. However, if you are looking to pay off your mortgage faster, you might go for the 15-year mortgage instead. Though your monthly payments will be higher than the 30-year mortgage, this payment schedule will help you become debt-free faster. Plus, the average interest rates for 15-year loans are typically lower than that of the 30-year loans. By paying a lower interest rate over a shorter period of time, you will actually save money on your mortgage, despite the higher monthly payments. If you don’t plan on staying in the home for long, then you might consider an adjustable-rate mortgage (ARM). ARMs have lower interest rates than fixed-rate mortgages in the beginning of your mortgage but tend to rise over time.
Buyers with good credit might be hesitant to apply for a mortgage because they don’t think that they will qualify. However, there are several loan options that have more lenient credit score requirements than the typical 620 FICO® score for Conventional Loans. FHA Loans offer financing for qualified buyers with credit scores as low as 580 (although you will likely need a larger down payment). However, it’s always best to try and improve your score as much as possible before applying for a loan because a higher credit score could help you qualify for lower mortgage rates.
Simply having student loans won’t prevent you from qualifying for a mortgage. But they can affect your debt-to-income (DTI) ratio, which could affect your mortgage qualification. Your DTI shows how much of your monthly income is going toward debts (like credit card bills, student loans, and car payments). A good DTI to aim for is less than 45%, but some government-backed loans accept a DTI as high as 50%. Remember that DTI requirements vary by lender, so always check with us if you have any questions.
The main thing home buyers know they will have to save for are their down payment and closing costs. While these are typically the largest upfront costs when buying a home, there are other costs that you will need to prepare for. For example, if your down payment is smaller than 20%*, you will likely need to pay mortgage insurance – which can cost 0.5% to 1% of your loan amount per year. Other costs include homeowners insurance, property taxes, and any other maintenance costs that might pop up.
If you have more specific questions about qualifying for a mortgage, let us know.
*Payment example: If you choose a $250,000, 30 year loan at a fixed rate of 3.3% (APR 3.5%), you would make 360 payments of $1,122.61. Payment stated does not include taxes and insurance, which will result in a higher payment.
** FHA Payment example: If you choose a $250,000, 30 year loan at a fixed rate of 3.75% (3.94 APR) you would make 360 monthly payments of $1,315. Payment stated does not include taxes and insurance, which will result in a higher payment.
Sources: Millionacres, Money, The Mortgage Reports