The mortgage industry has changed rapidly -- and with it, the requirements of homebuying. These days, buying a home is easier than you might think, and it’s an option for more people than the old rules coming out of the 2008 recession might suggest.
The reality is that there are a lot of confusing information out there when it comes to home affordability. So, we’ve asked industry experts to tell us the truth about the biggest misconceptions they’ve heard on home affordability.
Read on to get the real scoop:
Myth #1: You need to put 20% down
Once upon a time, this was true. In order to buy a house, you had to be prepared to make a down payment that was 20% of the home’s value. However, as housing prices have risen substantially over the past few decades, that benchmark has become increasingly unattainable for people, leaving many to assume they cannot afford to buy.
Luckily, the days of having to put 20% down are in the past, and times have certainly changed.
The idea that you have to put 20% down is the most common misconception I run into, and it’s unfortunate,” says Heather McRae, a Senior Loan Officer at Chicago Financial Services, Inc.
“Buyers don’t realize that today, there are conventional loan programs that require as little as 3% down, and if you are a veteran of the U.S. Armed Forces you can put 0% down. It’s all about finding the right loan program.”
As Heather points out, the amount you’ll have to put down will depend the loan program you choose and your options will vary according to where you’re located. Though, these days, you can typically expect a downpayment that’s between 3%-5% of the sale price.
If having a low down payment is a priority for you, focus on finding a loan officer who specializes in programs with low down payment options, as well as down payment assistance.
Myth #2: Your credit score has to be excellent
Another homebuying aspect that's changed in recent years is that you have to have close-to-perfect credit in order to be considered a qualified buyer.
As Gerald E. Robinson with 1st Choice Mortgage Company, LLC points out, “These days, some FHA and VA loan programs will accept a 500 FICO score, and some Rural Development Loan programs will go down to a 560.”
That said, while you can certainly buy with a lower score, keep in mind that there are some advantages to making sure your score is as high as possible before you apply for a loan. In particular, your credit score directly impacts your interest rate. Those with higher credit scores receive lower interest rates and will end up paying less over the life of the loan, so it’s to your benefit to try and raise your score as much as possible.
As for how to raise your credit score, the most important thing you can do is to focus on consistently making your payments on time, every month. Additionally, each month, work to pay as far above the minimum payment as you can. Doing so will help you pay down your debts faster, which will go a long way towards raising your score.
Myth #3: Pre-approval determines your budget
When you’re ready to buy a home, one of the first steps is to get a pre-approval. This document will tell you the maximum amount of money the bank is willing to loan you in order to purchase a home. Many buyers, especially first-timers, can make the mistake of assuming that the the figure on their pre-approval should become their budget, but that’s not necessarily the case.
“Take what the lender says you qualify for as a guideline, but create your own budget that takes into account everything, including continuing to save and invest," suggests Chris Downey of Harbor Mortgage Solutions, Inc. “Living well below your means has rarely got anyone into trouble.”
The first step in creating that budget is to use a mortgage calculator. This tool will help you estimate how large your monthly payment will be at a certain sale price. You can play around with various sale prices until you find a monthly payment that feels comfortable alongside your other recurring expenses. Ideally, you should make that sale price your maximum, regardless of what it says on your pre-approval.
Myth #4:Your payments will go up
Unfortunately, too many would-be buyers have heard horror stories of homeowners who have found themselves under water after their payments suddenly shot up and kept going. While these instances have happened, you shouldn’t let them scare away from buying a home. With the right research, you can make sure that your payment stays manageable.
“Changing payments are two-fold”, says Corey Vandenberg with Platinum Home Mortgage. “First, it can happen with a variable interest rate.” If stable rates are your concern, opt for a fixed-rate mortgage rather than an adjustable-rate one, as the principal and interest will stay the same for the entire length of the loan.
“But more often, the increase happens from taxes and insurance,” he continues. “While taxes are likely out of our direct control, if you don't like your insurance cost, you can shop around.”
Pay attention to the interest rates outlined in your initial loan, and, if needed, consider refinancing after you’ve paid down the principal a bit.