Navigating the world of mortgages can feel like unraveling a web of complex financial jargon and societal expectations. Common mortgage myths often masquerade as truths, leading to confusion and, sometimes, costly mistakes. For homebuyers, sellers, and real estate enthusiasts, debunking these misconceptions is crucial for making informed financial decisions. Homeownership remains an essential milestone for many, yet the path to securing a mortgage is fraught with falsehoods that can trip up even the savviest shoppers. In this thorough exploration, we’ll peel back the common mortgage myths to reveal the actual landscape of mortgage reality.

As seasoned real estate investors, Steve Daria and Joleigh have often debunked the common mortgage myths. They attest to the variety of mortgage options that allow for lower down payments, opening doors for many aspiring homeowners.

Myth #1: A Down Payment of 20% Is Required

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

Saving for a 20% down payment is a standard pre-requisite for getting a mortgage. It is often perceived as the key that unlocks the door to home ownership.

The Reality

Strategies for Individuals

• Explore government-insured loans for low down payment options.
• Consider financial gifts from relatives, down payment assistance programs, or saving with your partner simultaneously.
• Calculate the total cost of a lower down payment, including interest and insurance, to compare with the initial challenges of saving 20%.

Myth #2: A High Credit Score Is Unattainable for Mortgage Approval

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

People with less-than-perfect credit scores are doomed to rental life, as mortgages are only for those with pristine scores in the 750-850 range.

The Reality

While good credit is an asset, having a perfect score to secure a mortgage isn’t necessary. Lenders offer programs that cater to individuals with fair credit by considering other factors, such as employment history and savings.

Strategies for Individuals

• Obtain a full credit report and correct any errors.
• Pay down existing debts to improve your debt-to-income ratio.
• Consult with a non-profit housing counselor for personalized advice on improving your credit.

Myth #3: Adjustable-Rate Mortgages (ARMs) Are Always Risky

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

ARMs are a financial minefield, destined to explode into high-interest rates that will leave you in a financial bind.

The Reality

If used strategically, ARMs can save you money, especially if you plan to sell or refinance your home before the interest rate adjusts. Some homebuyers can even offer a lower rate than the fixed-rate equivalent.

Strategies for Individuals

• Understand the adjustment terms, limits, and worst-case scenarios for your ARM.
• Have a solid understanding of your financial future and know if your income will rise in time for a potential rate increase.
• Compare the initial rates, adjustment caps, and indices to ensure your ARM fits your financial situation correctly.

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Myth #4: You Must Pay Off All Other Debts Before Applying for a Mortgage

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

No matter how small, existing debts will disqualify you from getting a mortgage and must be eradicated before applying.

The Reality

It’s not about the debt amount; it’s about the debt-to-income ratio (DTI). This ratio measures your monthly debt payments and gross income, and most lenders want a DTI ratio below 43%.

Paying off debts can benefit your DTI, but that doesn’t mean you must be entirely debt-free to get a mortgage.

Strategies for Individuals

• Focus on high-interest debts first to make the most significant impact on your DTI.
• Talk to a mortgage advisor to evaluate your specific financial situation and make a plan to address debts that might be a red flag to lenders.
• Please refrain from making large purchases or taking out new loans during the mortgage process, as they can affect your DTI and approval.

Myth #5: All Mortgages Are 30-Year Loans

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

A 30-year fixed-rate mortgage is the norm, and shorter-term mortgages don’t exist or aren’t worth considering.

The Reality

While the 30-year fixed-rate mortgage is popular, various options with various term lengths are available.

A 15-year fixed-rate mortgage, for example, offers a shorter term and lower interest rates, which can save you significant money on interest over the life of the loan.

Strategies for Individuals

• Determine the monthly payments and total cost of a shorter-term loan compared to a 30-year mortgage.
• Consider your long-term financial goals and timelines to choose the mortgage that aligns with your plans.
• Be realistic about your ability to commit to higher monthly payments associated with a shorter-term loan.

Myth #6: Pre-Qualification and Preapproval Are the Same

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

Getting pre-qualified is as good as being pre-approved when shopping for a mortgage.

The Reality

Strategies for Individuals

• Continuously pursue preapproval before house hunting to understand your buying power and ensure you can act quickly when you find a property.
• Be prepared to provide comprehensive financial documentation for preapproval.
• Preapproval does not guarantee financing and may still be subject to a successful appraisal and satisfactory credit history.

Myth #7: Mortgage Rates Are Set in Stone Once Offered

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

Once a lender provides a mortgage rate, that’s the only rate you can get.

The Reality

Mortgage rates fluctuate with the financial market and can change until you lock in your rate. Rate locks are most of the time suitable for 30, 45, or 60 days, during which time your quoted rate is secured during this time.

Strategies for Individuals

• Monitor financial news and indicators when preparing to apply for a mortgage.
• Understand that rate quotes can change daily, and that rate locks usually come with specific conditions and fees.
• Work with a trustworthy lender to stay informed and be ready to lock in your rate when the time is right.

Myth #8: You Won’t Get Approved If You Work for Yourself

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

Due to their irregular income, self-employed individuals need help getting approved for a mortgage.

The Reality

While it can be more challenging, self-employed individuals can secure a mortgage. Lenders will typically look at your tax returns from the past two years to determine your average income and predictability.

Strategies for Individuals

• Keep detailed, organized, and accurate financial records, this will include balance sheets, profit and loss statements, and tax returns.
• Minimize red flags such as significant, unexplained business expenses or inconsistent income.
• Consider setting up an S-corporation or LLC for your business to show stability and separate personal and business finances.

Myth #9: You Can’t Refinance with Less Than 20% Equity

Here, we’ll address one of the common mortgage myths and reveal the reality:

The Myth

Refinancing is only an option if you have 20% equity in your home.

The Reality

While the Home Affordable Refinance Program (HARP) has ended, many lenders offer refinance options for borrowers with less than 20% equity.

Programs like the Freddie Mac Enhanced Relief Refinance and the FHA Streamline Refinance are available for qualifying homeowners.

Strategies for Individuals

• Research government-backed and private refinance programs to determine if you’re eligible.
• Work to improve your credit and income if your goal is to refinance into a conventional loan to save on mortgage insurance costs.
• Consult a mortgage professional to assess your refinancing options based on your current mortgage terms and financial situation.

Myth #10: It’s Cheaper to Rent Than to Buy a Home

Here, we’ll address the last of the common mortgage myths and reveal the reality:

The Myth

The costs associated with homeownership—mortgage payments, property taxes, repairs, and maintenance—often exceed what you would pay as a renter.

The Reality

Today’s low mortgage rates can make monthly mortgage payments competitive with or even less than monthly rent payments.

Additionally, homeowners build home equity over time, whereas renters do not.

Strategies for Individuals

• Use online rent versus buy calculators to compare your area and situation costs.
• Consider long-term financial goals, market trends, and lifestyle when making the rent-or-buy decision.
• Explore additional costs associated with homeownership, such as HOA fees, property taxes, and maintenance, to make a fully informed decision.

Conclusion

The mortgage process is filled with nuances, complex terminology, and often misconceptions. You’ll be better equipped for an informed and successful homebuying or refinancing experience by overturning these ten common mortgage myths.

Remember, every borrower’s financial situation is unique, and the key to navigating the mortgage market is personalized research, professional advice, and patience. Whether you’re turning the key to your first home or fifth, understanding the reality of mortgages is your first step toward a secure financial future.

**NOTICE:  Please note that the content presented in this post is intended solely for informational and educational purposes. It should not be construed as legal or financial advice or relied upon as a replacement for consultation with a qualified attorney or CPA. For specific guidance on legal or financial matters, readers are encouraged to seek professional assistance from an attorney, CPA, or other appropriate professional regarding the subject matter.