Purchasing a home is one of the most important expenses during a lifetime. For first time homebuyers, this process is exciting and stressful. While buying a home can complicated and intimidating, there is an extremely rewarding end result. There are many myths surrounding the home buying process, it is important to decipher the real truth of owning your dream home.
Myth #1: You must have a “perfect” credit score to buy a home
While credit score is important to buying a home, you don’t need a perfect 850 credit score. Having good credit (typically over 700) still supports a favorable rate on a mortgage. Additionally, there are a multitude of other factors lenders consider when determining whether you qualify for a loan. If you have a decent income and low debt, you may still qualify for a mortgage despite a low credit score.
Myth #2: You won’t qualify for a loan if you have significant student loan debt
Lenders do consider student loan debt, however it does not determine one’s ability to receive a mortgage loan. When qualifying for a loan, debt-to-income ratios (DTIs) are more important than student debt. Lenders consider two type of DTIs: front-end ratios and back-end ratios. Front-end DTIs are calculated by dividing your expected monthly housing expenses by your gross monthly income. Back-end DTIs are calculated by dividing monthly debt expenses by your gross monthly income. Typically, lenders prefer front-end ratios no higher than 28% and back-end ratios no higher than 36%. In addition to debt-to-income ratios, lenders will accept also your loan application based other factors (such as credit score) if they feel confident in you as a borrower.
Myth #3: You need to put 20% down
Although a 20% down payment on a home is recommended, it is not requirement to purchase a home. In 2014, the average down payment for first time homebuyers was only 6%. This 2014 low down payment percentage was due to Federal Housing Administration (FHA) loan popularity among first time buyers. While some conventional loans may require 20% down, FHA loans offer a 3.5% down payment. Many lenders offer conventional loans with 15%, 10%, or sometimes as low as 1%, and 0% down. When considering a down payment, remember lower down payments will increase interest rates. Down payments below 20% require mortgage insurance.
Myth #4: It’s always cheaper to rent
Although renting is a presumed cheaper option compared to owning a home, this is not necessarily true. Rent payment amounts depend on factors such as the location and size of the property. While renting may be cheaper under certain circumstances, rent money does not build equity. On the contrary, paying your mortgage on your home does build equity. Furthermore, if you have a fixed rate mortgage, your monthly principal and interest payments will be constant for years to come. However, rents are subjected to possible increases. Learn more about rent-to-own vs mortgages.
Myth #5: The process is long and complicated
Loan officers and others will help you every step of the way during the mortgage process of purchasing a home. Keep track of all your documents such as pay stubs, W-2’s, driver licenses, etc. This will speed the mortgage processing and organization for your lender.