Common home loan myths busted

Common Home Loan Myths Busted: What You Really Need to Know

For many people, buying a home is one of the biggest financial decisions they will ever make. Yet, in the world of home loans and mortgages, misinformation abounds. Whether it’s advice from well-meaning friends or outdated information, home loan myths can lead potential buyers down the wrong path. Here, we separate fact from fiction to help you understand the home loan process better.

Myth 1: You Need a 20% Down Payment

One of the most persistent myths about buying a home is that you need to save up a 20% down payment. While putting 20% down can reduce your monthly payments and eliminate private mortgage insurance (PMI), it’s not a requirement. Many lenders offer loans with as little as 3-5% down, especially for first-time homebuyers. Programs from the Federal Housing Administration (FHA) and other government-backed options can facilitate lower down payments, making homeownership achievable sooner for many people.

Myth 2: Pre-Qualified Means Pre-Approved

The terms “pre-qualified” and “pre-approved” are often used interchangeably, but they mean different things. Getting pre-qualified is a basic step where you provide the bank or mortgage lender with an overview of your financial situation, like income and debts. Pre-approval, however, is more involved and actually involves the lender verifying your financial details and offering a tentative loan amount. A pre-approval can make you a more attractive buyer, as sellers know you have financing lined up.

Myth 3: Your Credit Must Be Perfect

Many potential homeowners hesitate because they believe a home loan is out of reach unless they have perfect credit. The truth is, while a higher credit score can secure better interest rates, there are options for those with fair or even poor credit. Lenders consider more than just your credit score; they look at factors like income, employment history, and debts. However, improving your credit score can help you secure a better deal, so it's still beneficial to know your score and work on it if necessary.

Myth 4: All Lenders Offer the Same Rates

Myth 5: Once You’re Pre-Approved, You’re Guaranteed a Loan

Pre-approval is a good step, but it's not a guarantee that you will receive the mortgage. Only after going through the full application process and meeting all the lender's requirements will you be guaranteed a loan. Any major changes in your financial situation, like changes in employment or significant purchases, between the time you are pre-approved and when you close on a house can affect your lender's decision.

Myth 6: You Should Choose the Loan With the Lowest Monthly Payment

When comparing loans, it's easy to assume that the one with the lowest monthly payment is the best option. However, it’s important to consider the overall terms and costs of the loan. Loans with lower monthly payments may have longer terms or adjustable rates that could increase in the future, ultimately costing you more. Look at all aspects of the loan — including the interest rate, term length, and any fees — before making a decision.

Myth 7: It’s Not Possible to Refinance If You Have No Equity

Homeowners often believe they can’t refinance their mortgages unless they have considerable equity in their homes. However, several programs, especially those backed by the government, allow refinancing even if you owe more than your home is worth. In the wake of the housing crash, programs like HARP (Home Affordable Refinance Program) were developed precisely to help homeowners in this situation. Always check current programs and options in the market.

Myth 8: You Should Always Pay Off Your Mortgage as Soon as Possible

While being debt-free is an appealing notion, it's not always financially savvy to rush to pay off a mortgage. For some homeowners, having the mortgage interest tax deduction can be advantageous, and with current low interest rates, your money might be more effective elsewhere, such as investing in retirement savings or paying off higher interest debt like credit cards. Your financial advisor can help you decide what makes sense for your situation.

Myth 9: Self-Employed Individuals Can't Get Home Loans

Self-employed individuals often think they're at a disadvantage in qualifying for a mortgage. While it can be more complex, self-employed people can indeed get home loans. The key difference is that lenders will want to see at least two years of self-employment income stability and often require more documentation, such as tax returns, profit and loss statements, and other financial statements, to verify income. Planning ahead and maintaining meticulous financial records can help smoothen the process.

Myth 10: It's Always Best to Get a 30-Year Fixed Mortgage

The classic 30-year fixed mortgage is a popular choice, but it isn’t always the best fit for every buyer. Depending on your situation, you might benefit from a 15-year mortgage, which usually offers lower interest rates, or an adjustable-rate mortgage (ARM), which can be advantageous if you plan to sell your home or refinance before the rate adjusts. Evaluate your long-term plans and financial goals before deciding.

Myth 11: You Can Save Money by Not Using a Real Estate Agent

Some buyers consider house hunting without a real estate agent to save on commission fees. However, it's the seller who pays the agent fees in most cases, not the buyer. Agents provide support in navigating home tours, offer market insights, and help with negotiations. Skipping an agent might seem like a cost-saving measure, but it can leave you without critical market expertise and negotiation skills.

Myth 12: A Bankruptcy Disqualifies You From Ever Getting a Mortgage

Past financial difficulties, such as bankruptcy, do not automatically disqualify you from obtaining a mortgage in the future. While you will have to undergo a waiting period and prove your ability to handle credit responsibly, it is still possible. Requirements and time frames vary depending on the type of bankruptcy you filed and the lender's specific policies, but options are available if you're committed to rebuilding your financial profile.

Myth 13: You Can’t Lock in a Rate Until After You Sign the Purchase Agreement

Many buyers mistakenly believe they can't secure their interest rate until after they’ve finalized a home purchase. In truth, lenders often allow you to lock in an interest rate when you apply for pre-approval or at some point during the negotiation before closing. Rate locks protect against rising interest rates and can extend for 30, 45, or 60 days, depending on the terms.

These myths underscore the importance of doing your research and understanding the home loan process thoroughly. With correct information, future homeowners can make informed decisions, avoid unnecessary pitfalls, and secure a loan that best suits their financial situation and goals. By challenging these common myths, buyers can approach their home loan journey with increased confidence and clarity.