TOP MORTGAGE MYTHS

MYTH: IT'S LESS EXPENSIVE TO RENT A HOME VS. OWNING A HOME

Although it may seem less expensive to rent in the beginning, it can actually be much costlier in the long run. The monthly rent payment may be less than a monthly mortgage payment, but it's important to remember that you are building equity in your home when paying a mortgage; it is an investment in your future. Rent also has the potential to rise each year, whereas with a fixed-rate mortgage, your monthly principal and interest payments will stay the same for the life of the loan. In addition, owning a home can include many tax benefits.

MYTH: INCOME, CREDIT, DEBT, AND BANKRUPTCY CAN BE DEAL BREAKERS

• Income - While the income a potential borrower makes is important, other factors such as credit, debt, and financial history can impact how much a homebuyer is eligible to borrow. Simply earning a decent living is not enough to be approved for a loan. On the flip side, you can earn a modest income and still be approved, based on the outlying factors.
• Credit - Credit history is a determining factor in your ability to be approved for a home loan, and additionally will impact the interest rate you are offered. However, you don't need perfect or even excellent credit to buy a home. There are many programs available to borrowers with lower credit scores.
• Debt - Most people have some kind of debt, from student loans and auto loans to credit card debt. One of the first things that lenders look at when they determine whether you can afford to buy a home is your debt-to-income (DTI) ratio. Your DTI ratio is a percentage calculation that represents the percent of your monthly income that goes toward debt and recurring expenses. The higher your DTI ratio, the riskier you are as a mortgage candidate. However, if you have a DTI ratio of less than 50%, you'll usually be able to get a mortgage loan, even if you have debt.
• Bankruptcy - Depending on whether a bankruptcy is a Chapter 7 or 11, there are a minimum number of years that must pass before you'll be able to secure mortgage financing. If you do have a bankruptcy or judgments, be sure to discuss the necessary steps to be able to secure financing in the future with an experienced mortgage consultant.

MYTH: APPLYING FOR A MORTGAGE WILL HURT YOUR CREDIT

It is true that whenever you apply for a new loan or line of credit, your credit score will take a small hit. However, this temporary decrease will only last a short time. About 10% of your FICO® credit score comes from your recent credit inquiries. Therefore, when you apply for a mortgage loan, your score will temporarily drop, but you will likely not see this effect until after you receive your mortgage pre-approval. You can maximize your chances of getting mortgage approval by avoiding applying for new credit cards or loans in the months leading up to your mortgage application.

MYTH: PRE-QUALIFICATION AND PRE-APPROVAL ARE THE SAME

While they may sound similar, they are not the same. The main difference between a pre-qualification and pre-approval is the level of verification your lender requires before they provide you an estimate of how much you can afford to take out on a loan. With a pre-qualification, your lender only collects basic self-reported financial information, and no financial proof of income and debt is required. With a pre-approval, you have supplied financial information to include credit, employment, and income, and the lender has verified this information. The officer then packages the loan and submits the file to an underwriter for review. A lender will then provide you with a letter stating you've been pre-approved for a certain amount. With that letter, you'll be in prime position to make an offer when you find your dream home. However, the loan will go through formal underwriting when you go to purchase a property to ensure there are no changes to your financial situation. Changing jobs or adding additional debt are just a couple of reasons why a mortgage can be denied, even after being pre-approved.

MYTH: FHA LOANS ARE ONLY FOR FIRST-TIME HOMEBUYERS

Federal Housing Administration (FHA) loans are government-backed and allow lenders to issue loans with lesser credit and income requirements, compared to conventional loans. While they are a great option for first-time homebuyers, they are also available to homebuyers with lower credit scores, offering lesser interest rates and small down payment options.

MYTH: THE LOWEST INTEREST RATE IS ALWAYS BEST

When shopping for a home loan, there are many factors to consider. The interest rate, the cost you pay to borrow money, is important because it will affect the size of your monthly payments. It doesn’t, however, include any other fees you might be required to pay the lender for the loan, such as origination fees, closing fees, documentation fees, and other finance charges. The lowest interest rate will not always be in your best interest. Be sure to read the fine print and examine all fees. These costs vary from one mortgage lender to another, so it’s important to talk to at least three lenders to ensure you’re getting the best deal.

MYTH: YOU MUST PAY 20 PERCENT DOWN

Many homebuyers are led to believe they must have 20 percent of the home's purchase price saved for a down payment. While such a down payment can help lower your monthly payment, it's not a requirement. The more money you put down, the less you'll owe and the less strain you'll feel to cover your monthly mortgage payments. If you can’t afford 20 percent, there are many loan programs that do accept less. However, be prepared to pay Private Mortgage Insurance (PMI), which is added to your monthly payment to cover the extra risk the lender is taking. Other types of loans (such as VA and USDA loans) don't require PMI, but may require you to pay another type of insurance or funding fee.

MYTH: YOU CAN NEVER PAY YOUR MORTGAGE OFF EARLY

Some lenders may include clauses called "prepayment penalties" inside the terms of your loan. A prepayment penalty is an agreement that penalizes you if you pay off your mortgage too early. Lenders earn money on loans when you pay interest on the principal you borrow. The longer you make payments on your loan, the more money your lender gets in interest. If you pay off your loan too soon, the lender earns less money than they expected. If your loan has a prepayment penalty, it might stipulate that you cannot pay off your loan within 5 years of the date you close. If you do pay your loan off before the date stipulated in the loan terms, your lender might require you to pay any interest they would have earned upfront. This ensures that the lender earns back the money they expected when they issued your loan. Prepayment penalties are much less common than they once were. Many lenders offer loans with no prepayment penalties at all, but be sure to read the fine print or ask if you plan to pay off your mortgage early.

MYTH: IF YOU ARE DENIED A MORTGAGE ONCE, YOU WILL NEVER BE APPROVED

If you are turned down for a mortgage, don't panic. Paying off debts, paying bills on time, and improving credit scores can help you move from "no" to "yes" the next time you apply. If at first you don't succeed, don’t give up… work hard and try, try again!