Many potential home buyers have difficulty understanding the mortgage process. Lack of knowledge may contribute to an already stressful situation, preventing home buyers from making the right choices for their particular situation. Myths about the mortgage process abound, adding to the confusion.
Read on for the truth behind five common mortgage myths, and find some tips on how to deal with the reality of the loan application process.
Myth 1
Potential home buyers must have near-perfect credit to qualify for a mortgage.
Reality
Mortgage lenders became more careful about approving loans after the collapse of the mortgage market in 2008. Increased lender caution does not prevent consumers with less-than-perfect credit from getting a mortgage, however. There might be mortgages for people with bad credit available. Lenders look at a potential home buyer’s mortgage or rental history and employment record in addition to credit score. Lenders also consider the applicant’s assets, ability to repay the loan and the amount of the loan in relation to property value. Credit scores do affect the interest rate offered to an applicant, with higher scores garnering lower interest rates.
Tips
Credit reports can contain mistakes, so prospective buyers should ask for copies and correct any errors. In some cases, a cosigner can compensate for the applicant’s less-than-stellar credit by guaranteeing mortgage payments will be made. Consumers should also keep in mind that one lender might deny a loan, while another will approve one, so it pays to shop around.
Myth 2
Lenders require a 20-percent down payment.
Reality
Though many consumers believe they need a large down payment to qualify for a mortgage, the truth is that a modest down payment and decent credit will qualify applicants in many housing markets. Consumers falling into the low- and medium-income categories can take advantage of federal and state programs that offer competitive mortgages with 5-percent down payments. Applicants falling outside those categories can get good rates from local banks with a 5- or 10-percent down payment.
Tips
The Federal Housing Administration offers mortgages with down payments as low as 3.5 percent. Conventional mortgages backed by Freddie Mac or Fannie Mae require down payments as small as 5 or 10 percent. Applicants seeking a home in a relatively stable market will have better luck finding a mortgage that requires a low down payment.
Myth 3
Home buyers should always opt for a 30-year fixed-rate mortgage.
Reality
Thirty-year fixed-rate mortgages look good to many consumers because they offer low payments and long-term protection from rate swings. These 30-year loans are easier to qualify for than loans requiring higher payments. Many people stay in their homes for five or six years. For these people, it may make sense to find a lower-cost adjustable rate mortgage offering rate protection for that length of time.
Tips
Potential home buyers should take stock of how long they expect to remain in the home. Consumers who take out 30-year mortgages for a home they plan to sell in a few years are essentially paying for insurance they do not really need.
Myth 4
Lenders require buyers to have been in their current jobs for at least two years before approving a mortgage.
Reality
Though lenders want to see stable employment history, they realize that people do not stay in their jobs as long as they did several decades ago. While a two-year history with the same employer is desirable, it is not an absolute requirement for a home loan. Applicants who have found employment in the same field at a higher pay level will most likely not suffer from a job change.
Tips
Applicants should refrain from changing jobs during the mortgage application process. Those who have gaps in their employment history will have a better chance of obtaining a mortgage if they stay in the same job for at least two years.
Myth 5
Shopping for a mortgage will damage a consumer’s credit score.
Reality
Credit bureaus understand that most consumers apply with several mortgage companies to find the best deal. They allow consumers a certain window of time, generally one to two weeks, in which to shop for a mortgage and allow multiple mortgage companies to examine their credit reports. All these inquiries will count as one inquiry for credit evaluation purposes.
Tips
Borrowers should confine their mortgage inquiries to one to two weeks of the first inquiry. They can request their own credit reports as often as they wish with no damage to their rating.
We qualified under a USDA Rural Development program when we bought our home. It was a time-consuming process to qualify. I think we were asked to submit info about how many times we go to the bathroom each day…but we were finally approved…despite our previous financial issues & far from perfect credit.
I think people fear rejection so much that they don’t even go through the pre-approval process because they think they’ll be denied. You never know until you try.
MYTHS BUSTED! 😉
I think a fixed rate mortgage is reasonable, especially now with historically low rates. Even if you don’t plan on being in the house for 30 years, the fixed rate is so great. (or get a 15 or 20-year fixed). The ARMs screwed a lot of people when rates jumped and there’s no reason to get in an ARM right now.
I held on to my old job for longer than I wanted because I thought if I left, we wouldn’t qualify. Wish I had read this a few years ago 🙂
I read that the 20-year mortgage is becoming more and more popular – that seems like a very appealing term. If you buy a home at 35, you’ll have it paid off by 55 if you follow the amortization schedule. But it’s a little bit more flexible than a 15-year mortgage in case you lose your job, etc.