If you're thinking about buying a home, you've probably heard several mortgage related myths. The truth is, these misconceptions are commonplace — primarily among people who haven't done their research. By educating yourself, you can distinguish truth from fiction. Here are seven mortgage related myths that need to die.
There are mortgage related myths regarding minimum down payments for a purchase. Decades ago, it was commonplace for banks to require a 20% down payment. However, requirements have relaxed a bit, and today, you can get a mortgage with only 3.5% or a 5% down payment, depending on whether you get a conventional or an FHA home loan.
A high credit score helps you qualify for the best mortgage rate, but excellent credit is not a requirement for a mortgage. Actually, you can get an FHA home loan with a 620 credit score, which is a low score by many lender standards. This doesn't mean that anyone can walk into a bank and get a home loan. There are still minimum requirements. For example, borrowers must provide tax returns from the past two years, and their most recent credit activity must be acceptable.
If you have a low credit score, and your spouse has an excellent credit score, you may assume that your spouse’s good credit cancels out your bad, especially if you're applying for a joint mortgage. However, mortgage lenders treat different credit scores differently. Some banks may take the average of both scores to determine the mortgage rate, whereas other banks determine the rate based on the lowest score. In either case, there's no way to get around a low credit score. Even if the bank takes the average of both scores, you'll still pay a higher rate than if the two of you had an excellent score.
This isn't necessarily true, especially after you factor in how much interest you pay over 30 years. The truth is, you'll save money with a 15-year or a 20-year mortgage. Mortgages with a shorter term typically qualify for better rates. You'll pay less interest, plus build equity faster. The downside to a shorter term: you’ll pay a higher monthly payment.
Are you thinking about refinancing your mortgage loan? Fortunately, if you don't want to get stuck with another 30 year debt, you can refinance for a much shorter term — perhaps a 10-year or 15-year loan.
Several banks advertise no closing costs refinancing. However, there is no such thing as a true no closing mortgage loan. There are fees associated with each mortgage, and these fees have to be paid by someone. Even if you don't pay cash out of pocket at closing, your lender may wrap these expenses into your mortgage loan, or pay your closing costs and then charge you a higher mortgage rate.
Is it harder to get a mortgage if you're self-employed? Sure. Is it impossible? Absolutely not. Just understand that the more write-offs you take when filing your tax return, the harder it'll be to qualify. This is because write-offs reduce your income. You might earn enough to afford a mortgage; but on paper, it'll appear as if you earned less.
So, are you ready to apply for a mortgage loan? Start shopping around today and compare rates among different lenders. Also, check your credit score before applying. This way, you can identify problems or errors that might influence your approval. What other mortgage myths need to die?