The home buying process can be overwhelming, especially when you are looking to finance your purchase with a mortgage. It’s important to not only understand the mortgage process, but to be aware of potential myths and misconceptions that exist.
Myth 1: Being pre-approved guarantees you’ll get a home loan
Getting pre-approved for a mortgage is a crucial step in purchasing a home. Sellers typically look for a potential buyer to be pre-approved because it indicates a buyer’s intent to purchase.
Pre-approval is given when a lender has checked a borrower’s credit, reviewed income and employment and commits to lending a certain amount of money. However, this preapproval is reliant on the fact a borrower’s income, employment and other factors don’t change during the financing process. A pre-approval does not take a specific property into consideration, so final approval of a loan will also depend upon the property itself.
During the home purchase process it’s important not to take any drastic measures like changing employment, advancing on credit cards, taking on additional debt or exhausting your savings reserved for a down payment and closing costs.
Myth 2: You must have a 20 percent down payment to purchase a home
This is a common misconception, especially among first-time home buyers. A larger down payment will help lower your monthly payments and interest but there are low down payment options.
Do note though, a lower down payment may prompt Private Mortgage Insurance (PMI). It’s recommended to know how much this costs and factor this into your monthly budget, but to also talk to your Mortgage Loan Officer about your options.
Myth 3: You need to have perfect credit to get a mortgage
While higher credit scores are definitely helpful in obtaining a home loan at a lower interest rate, they aren’t necessary. Lenders will also take into consideration a borrower’s stability – employment, assets borrower has for a down payment and income.
The minimum credit score needed for a conventional mortgage is 620, in which credit scores range from 300-850. However, if you can make the effort to build and/or improve your credit, it will be in your best interest.
Myth 4: A 30-year mortgage is the best option
Thirty-year fixed-rate mortgages are the most common in home loans, but not always in your best interest. If you can afford a higher payment on a shorter payback, you’ll be able to pay off your mortgage quicker.
If you’re not planning to stay in your home long, an adjustable-rate mortgage (ARM) could serve you even better, as they typically offer lower rates.
It’s important to compare the pros and cons of shorter versus longer term and fixed versus adjustable rate mortgages. Check out SouthPoint mortgage options here.
Myth 5: Paying off a mortgage as quick as possible is always best
It may seem like a sensible option to pay off your mortgage as quickly as possible, but it’s not always the best route.
You may earn a higher return if you take the extra funds you would use to pay down your mortgage and use it to invest in retirement or higher return options. You could also consider using these funds to pay down higher interest debt, such as credit cards or student loans.
Paying off your mortgage has its advantages, but it’s important to consider all of your options.
Making the decision to purchase a home is a big one, so take the time to understand the mortgage process. Don’t be afraid to reach out to one of our Mortgage Loan Officers to discuss your options.