6 home buying myths that waste time and money
You have decided to buy a house. Friends, family, even coworkers and random acquaintances offer their advice. It will not all be true.
They mean well, but what worked for someone else might not be the best option for you. Additionally, there are many widely held myths surrounding buying a home. Falling in love with them can actually make it harder to find the right place.
Here are some of the most common myths and why you shouldn’t believe them.
Myth # 1: You need a 20% deposit
This myth can freeze potential buyers. The median listing price in the United States is $ 385,000. You would need $ 77,000 readily available if you were to make a 20% down payment, an amount that can be intimidating for many people.
“It’s one of the biggest myths out there,” says John Mallett, founder of mortgage broker MainStreet Mortgage. “It keeps more people from entering the market or even seeing if they can qualify.”
In reality, a 20% down payment is more of a guideline than a hard and fast rule. In fact, the average down payment is 12%. For first-time buyers, it goes down to 7%.
Government-backed options, such as FHA loans and USDA loans, can be guaranteed with a drop of only 3.5%. If you are a member of the military or a veteran and you qualify for a VA loan, you can buy a home with 0% down payment.
Conventional loans also don’t require a 20% down payment, but with less money you will usually have to pay for private mortgage insurance. The PMI costs 0.5% to 1% of your loan amount per year and is paid in monthly installments. So if you have the money to pay 20% down payment, it might be a good idea to do so. Having more equity also protects you if home values drop.
You can also apply for a number of grants and home buying assistance programs that can provide money for a down payment. These programs can include grants, forgivable loans, and second mortgages that can provide partial or full down payment assistance. (Brokerage Redfin has compiled a list of down payment assistance programs available nationally and by state.)
Myth # 2: You should definitely get a 30-year fixed rate mortgage
The 30 year fixed rate mortgage is popular for a reason. The fixed rate means predictable payments, while the long payback period means relatively low payments.
However, this is not your only option and it is worth evaluating different types of loans to see which one best suits your needs. In many cases, a 30-year mortgage will be more expensive in the long term.
For example, if you’re more interested in paying off the mortgage faster and can afford higher monthly payments, you might consider a 15-year fixed rate loan.
These loans will generally have lower interest rates than 30-year loans (the average rate for a 15-year mortgage has been below 2.5% since last summer). By paying a lower interest rate for a shorter term, you will save money despite higher monthly payments.
An adjustable rate mortgage can be attractive if you don’t plan on staying in the house for long. Some ARMs will have very low interest rates during the initial fixed rate period, which can save money. However, if you don’t sell or refinance before the rate becomes variable, you could face a much higher rate and monthly payments.
Myth # 3: You can’t buy a home unless you have good credit
Sometimes even home buyers with good credit may be reluctant to apply for a mortgage because they think they won’t qualify.
While having a good credit rating will allow you to qualify for better mortgage rates, less than spectacular credit doesn’t mean you won’t qualify at all. Different lenders will have different minimum credit score requirements, but in general, you can get a conventional mortgage with a credit score as low as 620.
You have other options if your score is below 620. FHA loans, for example, will technically require a minimum of only 500, although you will likely need to make a larger down payment and your interest rate will not be the lowest. better. A credit score of 580 is more generally acceptable and still allows you to make a relatively low down payment.
The bottom line? The higher your credit score, the better the rate you are likely to qualify for, which can save you a lot of money. But if you don’t have perfect credit, there are still ways to become a homeowner.
Myth # 4: You can’t buy a house if you have student loans
Just because you have student loan debt doesn’t automatically rule you out of getting a home loan, either. What matters is whether or not you have enough income to cover your student loans, mortgage payments, and other debts.
This means that you will need to carefully consider your debt-to-income ratio. Your DTI represents the portion of your monthly income spent on debt repayment. You can calculate your DTI by taking your monthly debt expenses and dividing them by your gross monthly income.
A rule of thumb used by most lenders for an ideal DTI is 28% / 36%, where 28% of your monthly income goes to pay off all of your monthly debt expenses not including your mortgage payment and 36% is the maximum, including including the mortgage. However, some lenders will accept higher DTIs.
In fact, if your DTI is within a lender’s acceptable limits and you’ve paid off your student loan on time, your good payment history can help you qualify for a mortgage.
However, if your DTI is too high, you may not be able to qualify. To resolve this problem, you can search for programs that offer student loan repayment assistance to help you reduce your debt. There are other steps you can take to make the home buying process a success.
The FHA also recently relaxed its requirement for how student loan payments are calculated when determining a borrower’s monthly obligations. The new policy is based on the actual payments made rather than a percentage of the outstanding loan balance. The change will make it easier for people with student loans to qualify for an FHA loan.
Myth # 5: You don’t need a home inspection
In today’s booming housing market, some buyers have decided to forgo home inspections in order to win bidding wars. While this tactic can help you win the battle with other potential buyers, it also comes with a high level of risk.
Many lenders require a home inspection before you buy, but some lenders don’t. Even if your lender makes the home inspection optional, it’s not a good idea to forgo it.
Home inspections are designed to identify potential problems in a home. They can discover things as simple as stuck windows and plumbing leaks, cracked foundations and black mold infestations.
As a buyer, you want to be aware of any issues with the home so that you can either negotiate for repairs to be made as a condition of the purchase or move away from a home that may be unsafe or damaged in a way. irreparable.
Myth # 6: You only need to budget for a down payment and closing costs
Most homebuyers are well aware that they will need cash up front for their down payment and closing costs. However, these aren’t the only upfront costs you need to think about when buying a home.
Buying a home is a big expense, so you want to protect it by purchasing home insurance to cover potential damage to property, loss of personal belongings, and medical attention for visitors in the event of an accident on the property. your property.
In fact, your mortgage lender will require that you have a policy in place before closing. You should get insurance cost estimates and budget for them early on in the purchasing process. Costs will vary depending on your home’s value, location, condition, type of coverage, and many other factors. However, the average cost of insurance is approximately $ 2,300 per year.
You’ll also want to budget for property taxes, homeowners association fees, and garbage collection fees, if applicable. These are things you need to consider when calculating the total cost of buying a home.
Finally, when you buy a house, you have to move into it. While some new owners are willing to pack their belongings, rent a truck, and move on their own, for others, a move involves hiring professionals to handle the entire process. Get estimates from different companies and make sure you factor the costs into your home buying budget.
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