Get the truth about these common misconceptions.
- Buying is about more than a down payment and a good credit score.
- Owning isn’t automatically better than renting.
Whether you’re buying a starter home or a forever home, purchasing property is a big deal. And if you’re doing so for the first time, it’s important to arm yourself with the right information. That also means knowing what to ignore. Here are three home-buying myths that have the potential to lead you astray.
1. You have to make a 20% down payment
You may have heard that to get a mortgage, you need to bring a 20% down payment to the table. But that’s just not true. In some parts of the country, a starter home can cost close to $1 million. And you may not have $200,000 in cash at the ready.
Many conventional mortgage lenders will accept a down payment lower than 20%. Some might agree to 10% down, while others might go as low as 5%.
If you don’t make a 20% down payment on a conventional loan, you do have to pay private mortgage insurance (PMI), a costly premium that’s usually tacked on to your monthly mortgage payments. But you can get rid of PMI when you’ve built enough equity in your home, so it may be worth paying that fee if it means you can own a home sooner.
There are also types of mortgages that let you put down less money at closing. If you’re a U.S. military member or veteran, for example, you may be eligible for a VA loan, which requires no money down. FHA loans also let you put down as little as 3.5%, so it pays to explore your borrowing options if you can afford to keep up with a mortgage, but have limited down payment funds.
2. The only thing you need to worry about when applying for a mortgage is your credit score
There are several factors mortgage lenders take into account when reviewing loan applications, and credit scores are a big one. The higher your score, the more likely you are to get approved to borrow money for a home, but also to snag a competitive interest rate on that loan. But your credit score isn’t the only thing mortgage lenders look at. They also pay close attention to your debt-to-income ratio, which measures how much debt you have relative to your income.
Too high a ratio could be a red flag that you’re already overextended, even if your credit score is strong. So you may want to pay down some debt before submitting a mortgage application.
Your income also plays a factor in mortgage approval. Lenders want to see that you have a steady job before loaning you money, and your income needs to be high enough to cover the amount you’re requesting. If you’re thinking of switching industries and taking a pay cut, you may want to hold off until you close on a mortgage.
3. Owning makes more financial sense than renting
When you rent a home, housing is a pure expense. When you own, the money you pay into your mortgage doesn’t just go away, because it can eventually help you own your home outright.
That doesn’t mean owning automatically makes more financial sense than renting. There are numerous expenses that come with owning a home, like property taxes, insurance, maintenance, and repairs.
Since some of those costs are variable and unpredictable, they can wreak havoc on your budget and keep you from meeting other financial goals. You may decide renting is an ideal option for you, since you can write out a single check each month to a landlord without having to spend more on surprise expenses.
If buying a home is one of your goals, arm yourself with good information before diving in — and ignore these myths that can lead you down a bad path.
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