Common Mortgage Myths Debunked
Mortgage Myth Buster Guide
There are a lot of myths and misinformation floating around about getting a mortgage. It's so bad that some people just give up on the dream of home ownership altogether. Busting some of these myths can help people learn the facts and work their way towards owning their own home. To help us separate mortgage fact from fiction, we sat down with State College mortgage broker D. Shane Whitteker. He is the owner and chief broker at State College mortgage company Principle Home Mortgage.
Myth: I Will Never Be Able To Save up a 20% Down Payment, So My Dream of Home Ownership Will Never Come True.
The root of this myth comes from something very real - private mortgage insurance (PMI) requirements. Normally, if you're approved for a mortgage with less than 20% on a down payment, your lender will add a PMI premium to your monthly mortgage payment. This insurance reimburses your lender if you end up defaulting on your mortgage. It also adds an additional amount to your monthly payments. Once you reach 20% to 22% equity, your PMI payments will stop, and your monthly payments will drop.
Whitteker says that if you can’t afford a 20% down payment, don’t give up - there are plenty of low down payment mortgages available.
“There are a number of options for a lower down payment than 20%,” Whitteker says. “FHA, USDA, VA, and conventional financing all allow for lower down payments than 20%. USDA and VA allow for a zero down payment, FHA allows for 3.5% and conventional financing allows for a down payment of 3%.”
Myth: I Got Prequalified for a Loan, So I'm Ready To Go Buy a House
Pre-qualification does not mean pre-approval. If you're prequalified, that means your lender has your basic financial information. That usually isn't enough to buy the house you want as many lenders will want a clearer picture of your finances before accepting your offer. To receive a proper pre-approval, most lenders will want your recent bank statements, income documents, and your credit report. With those in hand, they'll have the information they need to pre-approve you for a loan, which enables you to look for a house with less trouble.
Whitteker warns to be careful of banks who use the terms "pre-approval" and "pre-qualification" interchangeably. This can lead to some pretty nasty surprises later on. You should also wait until you've gotten a proper appraisal to close a loan.
“In general, a pre-qualification or pre-qual is not equal to a pre-approval,” Whitteker says. “I have run into clients with a pre-qualification where the bank did not actually review income, assets, employment history etc. They had only reviewed credit. If you are getting ready to purchase a home you definitely need to make sure you have a pre-approval as opposed to a pre-qualification.”
Myth: I Will Get a Penalty if I Try To Pay Down My Mortgage Sooner.
This is far less common than it was 20 years ago or even five years ago. These pre-payment penalties exist because lenders make their money on the interest you pay as you get closer to paying your loan down. Such penalties exist because lenders can't make as much money off of you if you pay ahead of schedule.
Whitteker says they’re largely a vestige of a bygone era.
“On a primary residence pre-payment penalties really are a thing of the past,” Whitteker says. “ All agency mortgages, FHA, VA, USDA, Fannie Mae, Freddie Mac have no pre-payment penalty. You can pay these loans down more quickly than scheduled or pay them off at any time and incur no penalty.”
Myth: I Don't Really Need To Save for Closing Costs.
In reality, you certainly do. Closing costs are independent from the actual down payment of your loan even though they're due at the same time. These are the fees that you have to pay your lender for finalizing your loan. They also cover the cost of your appraisal and your title insurance among other things. On average, they can range between 3-6% of your total loan balance.
If you discover that you can't afford your closing costs, you can ask for seller concessions. These allow the seller of the house to cover some of these costs. How much they'll accept in concessions depends on the nature of your mortgage market, but some can concede as much as all of your closing costs if you have a buyer’s market. It's better, however, to take these costs into mind when you budget before hand than to ask for concessions later.
“You may be able to get the seller to pay for closing costs but this has to be negotiated into the contract,” Whitteker says.
He warns though that by attaching the request that the seller pick up some of the closing costs, you’re effectively downgrading your offer.
“This scenario is also a less competitive offer on the home you are trying to purchase,” Whitteker says. “We are currently in a very strong seller’s market in State College and throughout much of the country. Offers made with a contingency of seller assistance towards closing costs are far less likely to be accepted when competing offers area present. You will also have some out of pocket expenses even if you get the seller to cover your closing costs. Your appraisal is typically an out of pocket expense and any inspections you elect are typically paid before closing.”
Myth: My Credit Is Under 700, So I'm Locked Out of the Home Buying Experience.
Even though your credit score is a significant factor in obtaining a loan, low credit scores don't automatically keep you from buying a home. Many lenders now offer loans to people with credit scores as low as 580 with a large enough down payment. Another option is to take out a mortgage backed by the Federal Housing Administration. FHA-backed and -insured loans allow lenders to lend money to people with lower income requirements.
For example, if your credit score is around 580, you can get an FHA-backed loan with a 3.5% down payment. If you have a 10% payment, you can get one of these loans with a score as low as 500. Otherwise, most standard loans are available to people with credit scores as low as 620, so you should be all right if you're under 700 by a small margin.
While not ideal, Whitteker says a low credit score is not necessarily a deal breaker when getting a home mortgage.
“The lower your credit score the more difficult it may be to acquire mortgage financing but it is quite common to financing borrowers with a 620 or better credit score,” Whitteker says. “Once you go below a 620 it does become more difficult but there are still viable options. As a mortgage broker I regularly close loans for borrowers with a 580 to 620 credit score. Below a 580 is possible but definitely becomes more difficult.”
Myth: I'm Afraid That Applying for a Mortgage Will Hurt My Credit Score.
According to Whitteker, the impact on your credit score from applying for a mortgage is slim to none.
“The credit bureaus are set up to recognize credit pulls by mortgage companies,” Whitteker says. “The impact on your score is negligible to nothing. You have at least a two week window where you can have your credit pulled for mortgages by multiple companies without a negative impact on your credit score.”
What is happening with mortgages, and how does the mortgage picture look going into 2023? We discussed the matter with State College mortgage broker D. Shane Whitteker.