Find out the truth about these common misconceptions.
- Buying is more than a down payment and a good credit rating.
- Owning is not automatically better than renting.
Whether you are buying a first home or a forever home, buying a property is a big deal. And if you’re doing it for the first time, it’s important to arm yourself with the right information. It also means knowing what to ignore. Here are three home buying myths that could be misleading you.
1. You must pay a 20% deposit
You may have heard that to get a mortgage you need to put down a 20% deposit on the table. But that’s just not true. In some parts of the country, a first home can cost close to a million dollars. And you may not have $200,000 in cash on hand.
Many conventional mortgage lenders will accept a down payment of less than 20%. Some might accept a 10% drop, while others might go as low as 5%.
If you don’t put down a 20% down payment on a conventional loan, you do have to pay for private mortgage insurance (PMI), an expensive premium that is usually added to your monthly mortgage payments. But you can get rid of the PMI when you’ve built up enough equity in your home, so paying that fee might be worth it if it means you can own a home sooner.
There are also types of mortgages that allow you to put down less money at closing. If you’re a US military or veteran, for example, you might qualify for a VA loan, which requires no down payment. FHA loans also allow you to 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 a limited down payment.
2. The only thing you need to worry about when applying for a mortgage is your credit score
Mortgage lenders consider several factors when reviewing loan applications, and credit scores are important. The higher your score, the more likely you are to be approved to borrow money for a home, and also to get 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-equity ratio, which measures the amount of debt you have relative to your income.
Too high a ratio could be a red flag that you are already overburdened, even if your credit score is high. You may want to pay off some debts before submitting a mortgage application.
Your income also plays a role in mortgage approval. Lenders want to make sure you have a stable job before lending you money, and your income must be high enough to cover the amount you are requesting. If you’re considering changing industries and cutting your salary, you might want to wait until you’ve taken out a mortgage.
3. Owning makes more sense financially than renting
When you rent accommodation, the accommodation is a pure expense. When you’re a homeowner, the money you put down on your mortgage doesn’t just disappear, because it can eventually help you own your home.
That’s not to say that owning automatically makes more sense financially than renting. There are many expenses that come with owning a home, such as property taxes, insurance, maintenance and repairs.
Since some of these costs are variable and unpredictable, they can wreak havoc on your budget and prevent you from achieving other financial goals. You may decide that renting is an ideal option for you, since you can issue a single check each month to a landlord without having to spend more on unexpected expenses.
If buying a home is one of your goals, arm yourself with good information before you dive in and ignore those myths that can lead you down the wrong path.
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