Whether you are a first-time home buyer, or looking to buy your next home, purchasing a home is both a thrilling and maybe nerve-racking journey. Part of the uncertainty comes from some misconceptions and myths about homebuying. Holding on to these myths often leads to costly mistakes or unnecessary stress. We’ll address 8 common myths and misconceptions so you can make informed decisions and approach your homebuying experience with confidence.
Myth 1: You Need a 20% Down Payment
Reality: This myth persists, but it’s far from reality. While a 20% down payment can help you secure better loan terms, it’s not a requirement. Today, the mortgage marketplace has more products and programs available for those with lower down payment funds. People who qualify for an FHA loan, for example, can pay as little as 3.5% down, and a conventional loan may only require a 3% down payment. Veteran or active-duty military member might even qualify for a VA loan with no down payment. There are even additional special loan programs that cater to first-time buyers with smaller, and sometimes zero down payment options.
The time you spend saving for a larger down payment is not only delaying you getting into a new home, it is also time you’re not building equity and putting your money to work. As your home value increases over the years, you’re building equity even faster. So, it can actually be a better move to buy as soon as you can, without waiting to have a 20% down payment available.
Myth 2: You Need Excellent Credit
Reality: While a strong credit score can help you secure better rates, it’s not the only factor lenders consider. Good home loans and attractive rates are available for people with less-than-perfect credit as well as those with excellent credit. Lenders also evaluate income, debt-to-income ratio and employment history when assessing applications.
Even if your credit isn’t perfect, there are still opportunities to qualify for a mortgage. Some FHA loan programs are available to buyers with credit scores as low as 580. Focus on improving your credit while researching loan programs. Obviously, the better your credit, the better interest rate you’ll qualify for; you’ll also have more loan options. But if you have a few dings on your credit report, you can still pursue homeownership.
Myth 3: You Can't Buy a Home if You Have Student Loans
Reality: Student loans can both help and hurt your chances of buying a home. The potential help comes from boosting your credit scores, if you make your payments on time. The potential hurt comes from raising your debt-to-income ratio, or DTI, which is a factor in loan approval. Student loans are not an automatic barrier. They're just another form of debt that's part of your DTI calculation. Many people have student loans and a home mortgage.
Myth 4: You Cannot Buy a Home If You Are Self-Employed
Reality: You absolutely can buy a home if you are self-employed; a freelancer or gig worker, business owner, etc. But the rules for getting a mortgage are different for those who receive a W-2 from an employer versus those who receive a 1099-NEC, which reports non-employee compensation.
Lenders will generally require more documentation of income if you’re self-employed, including recent invoices and proof of a steady income over a longer period of time, but it is absolutely possible for self-employed buyers to purchase a home.
Myth 5: Renting is Always Cheaper than Buying
Reality: Often, a mortgage payment is equal to, or even less than a monthly rent payment. In addition, rent payments usually increase over time, sometimes yearly, each time your lease renews. Also, there is always the possibility that your landlord will sell the place you are renting, and the new landlord will substantially increase the rent, or stop renting the property after your current lease expires, leaving you having to find a new home.
Another myth, touting renting over homeownership, is that renters don’t pay taxes while homeowners do. This is a common myth about buying a home. The fact is your rent payment does include the taxes your landlord must pay on the property. They’re invisible to you because they’re not itemized in your monthly rent payment like they are in a mortgage payment. Landlords pass those expenses on as part of your rent. Also, as a renter, you’ll want to have renter’s insurance to cover your personal items.
Homeowners do have more expenses than renters, like lawn care, snow removal and home maintenance, costs; however, buying offers long-term benefits like building equity and wealth. While renting may have lower initial costs, as a homeowner, each mortgage payment you make, is building equity, plus the home value increasing. Paying rent benefits the landlord and builds their equity and wealth.
Myth 6: You Should Wait to Buy a Home Until Prices are Lower – Cost of Waiting
Reality: Homes prices keep increasing. While some areas are experiencing slower growth, home values are still increasing. Mortgage rates should move a bit below from where they are now in the future, but waiting only puts a higher price tag on your home purchase and delays you creating home equity and wealth.
Myth 7: Mortgage Rates are Too High
Reality: Mortgage rates fluctuate all the time, and you might miss out on a great rate if they spike even by a quarter of a point. While you wait for mortgage rates to decrease, home values continue to increase, offsetting a possible lower rate. Also, you can always re-finance when rates decrease.
If you end up with a mortgage loan at 6.25% instead of 5%, you’re still getting a very good rate. Historically, interest rates have been much higher—in the ’70s and ’80s, they were at least twice as high as they are now, and in 1981, rates peaked at over 18%. Historically speaking, rates are OK right now and there’s no reason to put off homeownership just because rates go up a quarter or even half a percent.
Myth 8: You Should Find a Home Before You Apply for a Home Loan
Reality: Getting pre-qualified for a loan before you shop for a home is the right way to proceed. Getting pre-approved, before you go out looking at homes, will give you an idea of how much you can borrow to buy a home. Then you can shop for homes in your price range, and you won't fall in love with a home outside your budget. Also, when you find the right house, you won’t have to wait to get your pre-approval, and potentially losing out on the home you want.
If you're not able to get pre-approved, you'll find out what you need to do to position yourself so that you can.
Conclusion
The homebuying process can feel overwhelming, but understanding these common myths helps you make informed decisions. Remember, focus on what works for your circumstances and financial goals. Waiting to purchase a home only delays homeownership and being able to build long-term wealth. Take proactive steps, like getting pre-approved, finding out what mortgage program you qualify for, exploring down payment programs and checking your credit.
Homeownership not only puts a roof over your head, it also helps you accumulate wealth for the long term by building equity. Your equity grows with each payment you make, plus the home appreciation. Researching your options and consulting with a real estate professional can help you make informed decisions when buying a home.
At Maxim Properties, we are here to educate and guide you through every step of your home buying journey. Contact a Maxim Properties real estate consultant for all your real estate needs.
