If you want to buy your own home, you will probably need to get a mortgage. Before you do so, it is important you know the facts about mortgage loans, and do not just listen to common myths.
Myth # 1: Shopping Around for Mortgage Lenders Lowers Your Credit Score
When searching for lenders, you will want to compare the mortgage rate trend to find the best interest rate. But you may have heard that making multiple inquiries on your credit score can make your score lower, in which case you could well be put off comparing. The idea that inquiring to multiple lenders will hurt your credit score is not wholly true. FICO enables you to make multiple rate inquiries without it affecting your credit score at all. However, there is a caveat. You must make all of your inquiries within a thirty-day period. So, you can visit as many mortgage lenders as you like, as long as it is completed within thirty days, without damaging your credit score.
Myth # 2: You Are Guaranteed a Loan When You Become Prequalified
It is vital you are prequalified for a mortgage before you start searching for a home, so you can have a good idea of what your budget is. However, prequalification does not mean you have actually been approved for the mortgage loan yet, contrary to the popular myth. Getting preapproved is what actually matters. With the prequalification process, your mortgage lender looks at your credit report and other finances to determine a reasonable amount you could be approved for, but the process does not entail rigorous scrutiny of your finances at that point, which is why being prequalified does not automatically mean you will get preapproved for your mortgage loan.
Myth # 3: You Need a 20% Down Payment to Get a Mortgage
Traditionally, mortgage lenders have required homebuyers to have a 20% down payment for their properties. But things have changed, so that is not always the case. Today, there are more mortgage options than ever before, and many lenders require much less than 20% as a down payment for qualifying people. For instance, the Federal Housing Administration offers mortgage loans with as little as 3.5% down payments.
Myth # 4: You Should Always Aim to Pay Off Your Mortgage Quickly
You may have heard people say that you should always pay off your mortgage loan as quickly as possible. While it is true that it can often be beneficial to pay off your mortgage quickly, it is not always the best thing to do. For example, rather than paying more money each month to pay off your mortgage sooner, consider investing that money. The interest that you earn on investments can be much higher than the interest you pay on your mortgage loan, so it can make more financial sense to invest. Do not assume that paying off your mortgage quickly is the best option. Spend time making calculations to discover what the right option is for you and your circumstances.
Myth # 5: You Cannot Buy a Home if You Are in Debt
The idea that you cannot buy a home if you have debts is not completely true. While debt can indeed make it difficult to get a mortgage, it is not always the case. For instance, many people have debts like monthly car payments and student loans. Those kinds of debts are so normal that they will not affect a lender’s decision alone. What is important to a mortgage lender is your debt-to-income ratio. That figure is found by taking the total of your recurring monthly debt payments and dividing the number by your total monthly income. Generally, to be approved for a mortgage, lenders expect your debt-to-income ratio to be 36% or less.