Myth No. 1: You'll need to put at least 20% down on a home
Conventional wisdom says that if you want to buy a home you'll need to put at least 20% down, so you better start saving. However, mortgage loans aren't always conventional. Putting 20% is often a strong suggestion, with the amount of your minimum down payment varying by lender and by the type of loan you're seeking.
For example, a Federal Housing Administration loan allows borrowers to put as little as 3.5% of the total price of house down as long as they have a credit score of 580 or higher (for context, the FICO score sales runs from a low of 300 to a high of 850). People with credit scores in the 500 to 579 range can still be approved for an FHA loan, but they'll need to put 10% down.
Talk with more than one lender and see what options are available. Chances are, most Americans can get by without putting 20% down. Just keep in mind that if you don't put 20% down, you may be required to pay private mortgage insurance on a monthly basis until your equity in the home reaches 20%.
Myth No. 2: You need a very good/excellent credit score to qualify for a mortgage
Make no mistake about it, having a very good or excellent credit score certainly helps your chances of securing a mortgage loan at an attractive rate. However, near-prime and subprime credit scores can also qualify for a mortgage loan.
While having a subprime or near-prime score isn't as optimal and will likely lead to a higher lending rate than if you had a prime credit score, options exist for people with credit scores of as low as 500. The key to securing a mortgage with a lower credit score is being able to make a large down payment. If you can put more money down, lenders may be willing to work with you.
Myth No. 3: Once you're prequalified for a home loan, you're all set
It's important that prospective homebuyers understand that there's a big difference between being "prequalified" for a home loan and being "preapproved." Being prequalified for a certain loan amount doesn't mean you'll be approved for that amount.
The prequalification process for a home loan is relatively simple and mostly surface scratching. You supply a prospective lender with your financial information, such as your income, assets, and debt, and your lender uses this data to provide a crude estimate of how large of a mortgage loan you'll be qualified for.
The preapproval process for a home loan is a much deeper dive. In the preapproval process, lenders will dig into your earnings history, contact your employer, verify your credit report, and analyze your current debt levels. After this deeper dive, your lender should be able to give you an exact dollar amount of what you're approved to buy, as well as provide you with a good idea of the interest rate you'll be paying.
However, you should note that even at the preapproval step, you aren't guaranteed to get the loan. Your lender can check your employment history at any time, and often will do so right before your loan closes. If you've changed jobs or lost your job, your loan could fall through.
Myth No. 4: Mortgage rates are the same everywhere
Another common misconception is that it doesn't matter where you go because you'll be paying the same mortgage rate. This is almost always incorrect.
For instance, credit unions typically look to undercut bigger banks since they have fewer fees, meaning they may be able to offer a lower mortgage rate. Similarly, choosing your current bank as your lender doesn't always mean you get preferential treatment when it comes to loan rates. You should always shop around instead of assuming that you're getting the best deal. Plus, if you have prime credit, banks and credit unions may even be willing to cut their mortgage rates slightly in order to gain your business.
Likewise, keep in mind that the location of your home can affect your mortgage rate. The health of a local housing market, as well as the average price of homes within a city or county, can also influence your interest rate.
Myth No. 5: 30-year mortgages are always the best way to go
Though 30-year mortgages are among the most popular options when taking out a loan to buy a home, they certainly aren't the only option available.
Generally speaking, lenders are willing to offer consumers a better rate based on the length of their loan. Longer loans bear more risk to the lender and thusly higher interest rates, while shorter-term loans have more favorable lending rates. If you can comfortably afford to do so, taking out a 15-year loan instead of 30-year could save you a lot of money over the life of the loan (assuming you make only the minimum payment).
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