Even if you're a first-time homebuyer, chances are you've come across advice or information about mortgages in the past. While some guidelines may have evolved over time, others were never accurate to begin with. While advice can be valuable, it's crucial to ensure that it's based on facts when making such a significant financial decision. Take a look at the most prevalent mortgage myths below to feel assured as you embark on your next home purchase.
The Myth of Needing Perfect Credit to Buy a Home
While your credit score plays a crucial role in securing a mortgage, it doesn't have to be flawless to find the right loan for your budget. Several factors contribute to determining your credit scores, including debt or credit utilization, credit history, timely payments, and more.
It's important to note that you don't have just one credit score. Most borrowers have up to three different credit scores, and mortgage lenders typically use the Fair Isaac Corporation (FICO) model, considering the middle score of the three or the lowest score of two when qualifying for a mortgage. If you're still building your credit, CrossCountry Mortgage offers loan programs that cater to borrowers in your situation. Depending on key factors such as income, existing debt, and location, you may qualify for a home loan through one of the options detailed below.
Federal Housing Administration (FHA) Loans
Backed by the government, FHA loans are home loans insured by the Federal Housing Administration. These loans come with less stringent requirements, making them a viable option for homebuyers who fall short of the thresholds required by conventional loans or those who struggle to cover closing costs.
FHA vs. Conventional Loans: Which Is the Best Fit for Me?
VA Loans
The U.S. Department of Veterans Affairs offers VA loans to current, retired, or disabled members of the military and/or their surviving spouses. VA loans usually don't require a down payment like FHA loans. However, they may include additional fees such as a funding fee, which can range from 1.4% to 3.6% of the loan amount. Making a larger down payment and applying for your first VA loan can reduce this fee.
Non-Qualifying Mortgages (Non-QM)
Non-qualifying mortgages, also known as non-QM loans, are designed to assist borrowers who don't meet the requirements for a traditional mortgage. These loans cater to individuals with a high debt-to-income ratio, irregular income, or those who don't meet the income verification standards set forth by the Dodd-Frank Act. It's important to note that non-QM loans do not comply with the consumer protection regulations established by the Consumer Financial Protection Bureau. Consequently, individuals with such financial backgrounds may not qualify for a standard mortgage but could potentially qualify for a non-QM loan.
Who May Benefit from Non-QM Loans?
- Self-employed workers, freelancers, and gig workers
- Borrowers building their credit
- Borrowers with substantial assets
- Borrowers from other countries
- Real estate investors
- Borrowers with unique properties
The 20% Down Payment Requirement Myth
The misconception that a 20% down payment is mandatory for purchasing a home stems from the aftermath of the 2007 housing crisis when credit access became more restricted due to widespread defaults on mortgage loans. However, current options for lower down payments have made homeownership more accessible. In some cases, it's even possible to buy a home with no down payment at all. While not having a full down payment requires mortgage insurance and an additional monthly payment, it can still enable borrowers to purchase a home and begin building equity for future investments. CrossCountry Mortgage offers a wide range of low- or no-down payment loan options, including:
- FHA loans
- VA loans
- HomeReady
- Home Possible
- Conventional 97 loan
Pre-Qualification Isn't Equivalent to Pre-Approval
Both prequalification and pre-approval provide borrowers with an estimate of their affordability for a home. However, pre-approval is a more formal process that involves the lender verifying the borrower's financial information and credit history. Preapproval may require documents such as pay stubs, W-2 forms, tax returns, and a Social Security card.
Pre-approval holds more weight than prequalification as it provides a stronger indication of what a borrower can afford and adds credibility to their offer. Moreover, presenting a pre-approval letter to sellers demonstrates that the borrower's financial information has been thoroughly vetted, proving their ability to afford a mortgage. However, specific requirements may vary, so it's essential to check with the lender.
During the pre-approval process, we:
- Collect earnings history
- Verify credit report
- Examine assets
- Analyze current debt levels
- May contact the employer
This comprehensive understanding of your finances allows us to provide an accurate dollar amount for which you are approved and gives you a better idea of your interest rate. While pre-approvals aren't set in stone, they are much more reliable than pre-qualifications. Get in touch with your neighborhood Mortgage Advisor at CrossCountry Mortgage today to learn more or get started.
Debunking Mortgage Myths
The Misconception That Renting Is Cheaper Than Buying
The widespread belief that renting is cheaper than buying a home is a fallacy. While it may hold true in some cases, purchasing a home can yield greater long-term savings compared to renting. Additionally, homeowners have more control over their property and can make improvements that increase its value, benefiting them when they decide to sell. Several crucial factors, such as property values, tax breaks, equity, and quality of life, must be considered when deciding whether to buy or rent. Homeowners can deduct mortgage interest payments, reducing their federal income tax and taxable income. Over time, they also build equity in their home, which can be used for loans or home improvements. On the contrary, renting does not build equity for the renter, and renters lack control over their living space.
Choosing the Best Loan Option: Beyond the Interest Rate
While interest rates are vital to consider, fully understanding the cost of a loan requires taking into account the annual percentage rate (APR). The APR encompasses additional expenses such as closing costs, origination fees, and private mortgage insurance. Comparing the APR of different loans provides a more comprehensive view of the costs associated with each loan, going beyond the interest rate alone. By reviewing the APR, you can ensure that you secure the best overall loan and make an informed decision.
Had Enough of the "Myth" Information?
Now that you're aware of the truth behind these common mortgage myths, you can confidently plan your home purchase. If you have additional questions, feel free to reach out to your local Mortgage Advisor at CrossCountry Mortgage, or visit our blog page for more information.
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