Mortgage myths are everywhere, which makes understanding the mortgage process much more difficult than it should be. Becoming a homeowner should be an amazing experience; not one that causes confusion and frustration. Our team at AnnieMac Home Mortgage is here to debunk some of the most common myths and put your mind at ease.
Here are some common misconceptions about mortgages:
You Need to Put 20% Down to Purchase a Home
This is a common misconception that potential homebuyers are always fearful of, but the good news is that you do not need to put down 20% to purchase a home. Conventional loans may require as little as 3% down and some government-back loans have a 0% down requirement. The 20% down payment myth comes from the mortgage lender’s private mortgage insurance requirement. Private mortgage insurance is a type of protection that ensures that your lender is protected if you default on your mortgage. Mortgage’s with less than a 20% down payment will result in the purchase of PMI and will be added to your monthly payment.
Pre-qualification is the Same as Pre-approval
These two phrases may sound the same, but they are in fact very different. Pre-qualification is an estimate of how much money you may be approved to borrow for a home loan. Pre-approval is when a potential borrower has supplied substantial financial information including credit, employment, and income. Your lender will then verify this information and give you a letter stating your approved loan amount. Pre-qualification helps provide a basic idea of what amount you may be qualified to borrow while you are searching for a home. A pre-approval is much stronger and shows sellers that you can secure a mortgage.
Pre-approval Guarantees You Will Receive a Home Loan
Getting pre-approved for a home loan does not guarantee that a mortgage will be officially approved and closed. There are many different reasons why a mortgage can be denied after a borrower has been pre-approved. Reasons for denial include changing jobs, adding additional debt, and not having enough money to cover the costs of getting a mortgage. If you are pre-approved for a mortgage, talk to your mortgage professional first before making any financial changes.
You Need to Have Perfect Credit to Qualify for a Mortgage
Credit plays a major role in qualifying for a home loan, but this does not mean that you need perfect credit to purchase a home. Potential borrowers with lower credit scores have options and ways to get around credit requirements. The most common loan that is more forgiving for borrowers with low credit scores is an FHA loan. These loans are government-back loans with insurance from the Federal Housing Administration. This insurance gives lenders the ability to issue FHA loans with lower credit and income requirements compared to conventional loans.
Your Down Payment Covers Your Closing Costs
The down payment is usually the largest payment you will make when buying a home with a mortgage, but it does not cover your closing costs. Closing costs are processing fees that you pay to your lender for creating and finalizing your mortgage. Your down payment and closing costs are both due when you close on your home loan. Closing costs normally range between 3% to 6% of the total balance of your loan, separate from the down payment.
There are many different mortgage myths that can make the mortgage process seem more complicated than it actually is. Be sure to do your research before you apply for a mortgage to ensure that you are prepared for the process.