Buying your first home is one of the most intimidating and overwhelming purchases that we make in our adult lives. The idea of a mortgage can be daunting, and may make you question your creditworthiness, your financial obligations as a mortgage holder, and what it means to have a home as an investment. Often times, consumers are misled by their own misconceptions and have yet to learn the facts about mortgages. Here are some common mortgage myths and the truth behind them.
A High Credit Score isn’t a Must
Many home hunters think that a high or near perfect credit score is a necessity in order to qualify for a mortgage in the first place. Thankfully, this is false. Some first-time homeowners haven’t adequately built up their credit, so there are fortunately loans out there, such as a FHA loan, that have a minimum FICO score requirement of 580. If your credit score is lower than this, consider taking a few years to better build your score. A higher score can mean more flexibility in home buying.
You Don’t Need a 20% Down Payment
The 20 percent marker as a goal for down payment is nothing less than intimidating. These days, there are many loans that do not require 20% down. The previously mentioned FHA loan can require as little as 3.5% down. The downside to this is the required PMI (private mortgage insurance) that is tacked on top of the mortgage payment as a protection for the lender. One unconventional route is taking out a loan for your down payment on top of the mortgage loan, but this much borrowing can get out of hand quickly. Keep in mind that the lower the down payment, the higher the monthly mortgage payment.
A Home Investment is a Not-So-Sure Thing
Some people believe that buying a house as an investment opportunity is a sure thing for return on investment. This simply is not the truth. Although a house can hold its value, it’s important not to go into home buying with only returns in mind. The housing market is a fickle creature and, even when things are good, values rise slowly. Particularly if your down payment is small, remember that it takes a while to build equity. More of the first few payments in the life of a loan go towards interest, not the equity nest egg. Even if you are approved for a large mortgage loan, remember to keep the location of the home, as well as how well the home works for you, at the forefront of your mind, rather than being investment minded.
Pre-Qualified Is Not Pre-Approved
Before you begin your home perusal, start with a stop at the bank. Find out what you are pre-qualified for and let this number help navigate your hunting. Don’t be fooled, though. Pre-qualifying doesn’t guarantee that you will be approved for that amount in the final purchasing hour. Once a home is decided upon, a lender will use things beyond your stated income to determine your approved amount. This includes things such as past tax returns and credit score. Further still, credit checks or major purchases up until your closing date can take a toll on what your mortgage lender will give out.
For a long time now, mortgages have been thought to be a piece of the puzzle that comes in at the tail-end of the process, but truly, this crucial financial part should be the first to be laid on the table. Then, set your eyes on your first potential home. Be armed with knowledge of what you can afford and what it means to invest in a home. Perhaps you are now looking forward to your first purchase that just moments ago you thought was an impossibility!