Mortgage myths can make you believe something harmful about mortgages. Because your home is one of the largest investments you will make, you must know the truth about mortgages. Below we cover the myths regarding the mortgage process as well as mortgages themselves.
Myth: A pre-qualification from a lender means you are approved for that exact mortgage amount.
Truth: A pre-qualification is only an estimate of what you ‘might’ qualify to receive. There is no guarantee that you will get it. A pre-qualification is different from a pre-approval. With a pre-qual, you only tell the lender your qualifying factors. They do not verify anything. In other words, they don’t ask for paystubs, asset statements, or even pull your credit. The lender tells you what you might qualify for if the factors you state are proven true.
A pre-approval, on the other hand, approves you for the loan based on the documents you provide. However, it is still subject to certain conditions, such as the appraisal or further verification of your qualifying factors.
Neither the pre-qualification or the pre-approval are a guarantee of a loan, though.
Myth: You have to make a 20% down payment.
Truth: In the past, many lenders preferred a 20% down payment. Today, however, there are many programs that require much less than 20% down on the home. A few examples include FHA, VA, and conventional loans. FHA loans require just a 3.5% down payment; VA loans don’t require any money down; Conventional loans require as little as 5% down.
However, if you take a conventional loan, you will need to pay Private Mortgage Insurance for a down payment lower than 20%. You will not pay the insurance for the life of the loan, though. As soon as you owe less than 80% of the home’s value, you can request that the lender cancel the insurance on your loan.
Myth: You can only get a mortgage if you have excellent credit.
Truth: This is another myth that keeps people from getting a mortgage. While excellent credit will give you access to the most programs and the lowest rates, it’s not required. Several lenders offer loan programs for those with average and even less than average scores.
The key is to shop around and ask different lenders about their programs. Even if you want an FHA loan, you should check with several lenders. You’ll find that each lender will provide a different rate and different closing costs. These all have an impact on your loan over its entirety. Don’t restrict yourself to government-backed loans if you don’t have perfect credit though. Inquire about the subprime loans that lenders offer. You may find an offer that suits you better.
Compare all terms, rates, and APRs so that you know the full impact of your mortgage and how much it will cost you in the end.
Myth: You should focus on getting the lowest interest rate.
Truth: Your mortgage is made up of more than your interest rate. You should focus on every aspect of the loan. This includes the interest rate, closing costs, and the APR. If you are going to focus on one aspect, it should be the APR.
Your loan’s APR is the total cost of the loan of its entire life. It takes into account any prepaid expenses and closing costs. This way you know what the loan costs you over the next 30 years. You might be surprised to find that some loans with a lower interest rate actually cost more in the end. Focusing on the APR can help you save as much money as possible over the next 30 years.
Myth: A 30-year loan is your only option.
Truth: A 30-year term is the most common, but it’s not your only option. You can also apply for a 20-year or 15-year term. The right term for you depends on what you can afford. The good news is that the less time you borrow money, the lower interest rate the lender may charge.
Always ask your lender what a 15 or 20-year term payment looks like. This way you can tell for yourself which option is right. You might be surprised to see how affordable a shorter-term payment is in the end. With a lower interest rate and higher principal payments, you will own your home free and clear faster.
Myth: Mortgages take a long time to process.
Truth: Every lender has their own timeline. Some lenders take longer than others, but in general, the turnaround time on mortgages isn’t more than a few weeks. The speed of mortgage processing depends on how well you respond to what the lender needs.
When you first apply for a mortgage, provide your most recent paystubs, last 2 years’ W-2s, tax returns, and asset statements. This will give the lender a good idea of where you stand. As the lender asks for more documents, provide them as quickly as possible. This keeps your loan at the front of the lender’s pipeline and decreases the waiting for your loan approval.
Of course, some lenders are slower than others. Before you commit to a lender, inquire about their turnaround time so you know what to expect.
There are many mortgage myths that people believe, keeping them from getting the mortgage they need. Don’t believe the myths and get the mortgage you deserve!