Owning a home is a great privilege that comes with both freedom and privacy. It’s part of the American dream for people from all walks of life: 83% of LGBTQ people say that they would like to own a home someday, though only 46% are currently homeowners. Black, Indigenous, and people of color also strive for homeownership despite the many obstacles in their way.
There are many advantages to homeownership, including that a monthly mortgage payment helps you build equity and save money over time by avoiding the rent trap.
That said, there are many persistent mortgage myths floating around that dissuade people from the home-buying process. It’s important to dispel these common mortgage myths so that more people, especially those from disadvantaged communities, can experience the joy of home ownership.
Myth 1: You Need a 20% Down Payment
You may often hear that you cannot buy a home until you have 20% of the purchase price saved. However, this is more of a suggestion than a requirement. For most conventional loans, the minimum down payment requirement is actually closer to 3%. The 20% benchmark simply allows you to avoid a private mortgage insurance premium.
Your down payment requirement also depends on the type of loan you are applying for. For example, an FHA loan from the Federal Housing Administration or a USDA loan both have lower down payment minimums to help more Americans afford homes. If you are eligible for VA loans as a veteran, active-duty service member, or surviving spouse, you won’t have to cover any down payment at all. However, VA loans do require a funding fee, though this expense is relatively small.
If you’re struggling to make that initial investment, don’t worry: many assistance programs can help home buyers by contributing a portion of the cost. This is especially important for LGBTQ+ and BIPOC individuals, as 65% of individuals from these communities put less than 20% down on their purchases.
Pride Lending will help match you to local, state, and national programs offering loans and grants to help make up the difference between your own contributions and what the lender expects, significantly dropping how much you have to provide.
Myth 2: You Need Perfect Credit to Get a Mortgage
Credit scores are very important in the home buying process, and they often pose a significant hurdle for marginalized individuals. As an example, young adults in majority Black neighborhoods have a median score of 582, and those in majority Hispanic areas have scores around 662. LGBTQ+ individuals are twice as likely as their peers to have “poor” or “very poor” credit.
This may seem disheartening, but you do not need a perfect credit score of 800 or above to qualify for most mortgages. For a conventional loan, most lenders want to see a credit report with a score of 620 or more.
FHA loans may be approved with an even lower credit score of 580. On the higher end, a jumbo loan has the highest credit score requirement, with minimums ranging from 680 to 740.
While it’s important to start building your credit history as early as possible, you still have options for acquiring a mortgage even if your score isn’t very good. Just remember that a formal credit inquiry can temporarily lower your score, so be careful about requesting too many hard pulls.
Myth 3: Renting is Always Cheaper Than Owning
Another common misconception is that renting is cheaper than owning in every circumstance. Once you get past the down payment and closing costs, owning a home is actually comparable to renting when it comes to the monthly cost.
In some cases, rent payments can be even higher than mortgage payments for comparable properties. Plus, owning a home has long-term financial benefits since you can take advantage of the equity you build with each monthly payment by selling or refinancing your home in the future.
There are also tax benefits to having a home, like being able to deduct the mortgage interest you pay each year from your tax bill. While the upfront costs of buying a home are greater, the lower ongoing costs can actually save you money over renting in certain places.
Myth 4: All Lenders Offer the Same Rates and Terms
The beauty of a free market is that you can shop around for the best possible product for your needs. Not all interest rates and loan terms are the same from lender to lender. Each lender will set a base interest rate for borrowers and then adjust it based on the individual buyer. This means you could shop around with several lenders for the same exact loan product, but each will offer varying amounts for the annual percentage rate.
Rates and terms can also vary if you go through a mortgage broker versus working directly with a lender. Pride Lending remains a popular mortgage broker because we can compare the terms of multiple wholesale lenders nationwide to ensure you have a program and terms that work for you.
Myth 5: You Should Always Choose the Lowest Interest Rate
Common sense would tell you to always seek a lower rate for any financial product. After all, this will give you the best chance of lowering monthly debt payments and lowering the total loan amount, helping you pay off your mortgage faster.
However, there are other things to consider when choosing a mortgage rate for your home. For example, closing costs like property taxes and origination fees can impact how much you pay each month. If you’re low on funds, accepting discount points upfront can help lower closing costs while raising your mortgage interest rate. For some homebuyers, this may be the right option.
When comparing mortgage rate offers, always calculate your break-even point and consider your long-term financial goals when deciding whether to prioritize a lower interest rate over other factors.
Myth 6: Fixed-Rate Mortgage (FRMs) Is Always Safer
A fixed-rate mortgage sounds like the best setup for a loan because it guarantees stable payments, but this is not always the best option for all homebuyers.
Although a fixed-rate mortgage does lock in your initial rate, FRMs tend to have higher overall mortgage rates than ARMS (adjustable-rate mortgages). For buyers who plan to sell or refinance soon after buying a home, an ARM could be the wiser choice thanks to the low interest rate.
An FRM is ideal if you plan to own your home for a long time and are offered a great mortgage rate on the loan.
Myth 7: Refinancing is Always a Good Idea
Refinancing is a strategy used to take advantage of equity or rearrange debt to save you money over the long term. If you’ve built home equity over a long period of time, you could refinance to take advantage of a lower interest rate due to having stronger credit than you did initially. You could also use refinancing to shorten your loan term or change home loan types.
Many homeowners use cash-out refinance to cover large purchases, debt consolidation, or home renovations. In this scenario, you create a new mortgage in a larger amount and take some of the equity you have built as a cash payment. If you choose to refinance, remember to calculate the break-even point and consider the closing costs associated with refinancing.
Liquidating your home equity into money for immediate needs can be a wise choice for some, but it’s important not to take on a larger mortgage without assessing your risk. If you’re not sure whether it’s a good idea, working through the financial information with a professional can ensure you’re making an informed choice.
Myth 8: You Can't Get a Mortgage If You're Self-Employed
You don’t need a conventional job to get a mortgage. Self-employed workers can get financing as easily as regular employees as long as they can prove their income. The difference is simply in the documentation that must be provided during the mortgage process.
You may need to provide letters from clients or certified accountants verifying your work. A business license, personal tax returns, business tax returns, income statements, or a “doing business as” certificate may also be requested by the lender. Increase your chances of approval by making a larger down payment, keeping your business and personal expenses separate, and applying for government-backed loans like FHA loans or USDA loans.
Myth 9: Private Mortgage Insurance is Required Forever
Private mortgage insurance (PMI) is a tool used by lenders to decrease risk when buyers borrow money, taking the form of an annual or monthly premium on top of your mortgage premiums. For a conventional loan, you may need to pay PMI if your down payment is less than 20%.
An FHA loan will almost always come with initial PMI premiums because of the riskier circumstances of the borrower. If you provide at least 10% upfront, you will only need to pay your mortgage insurance for 11 years, after which time it drops off.
But even if PMI is required, it does not last for the entire duration of your mortgage. PMI ends automatically when your loan-to-value ratio reaches 78% or if the term is halfway over.
Myth 10: Once You're Pre-Approved, You're Guaranteed a Loan
This is one of the biggest mortgage myths out there that can potentially hurt buyers due to a lack of accurate information. Pre-qualification is an important step for borrowers to take because it can arm them with an advantage over other buyers. The lender assesses the risk of lending you money using your credit score, debt-to-income ratio, and other data and provides you with a letter of approval up to a maximum loan amount. This can give you a rough estimate of how much you can afford and help guide your budget toward the home you can afford.
However, pre-approval comes with many conditions, and it does not guarantee a mortgage. For example, your pre-approval letter may only be valid for a few months, and if you apply after the time period has elapsed, you may no longer qualify. Also, the lender will reassess once you finalize your mortgage application to close on a home (a process known as underwriting).
If anything has changed with your financial situation since pre-approval, your application could be rejected. A pre-approved loan can help in your house hunt, but your mortgage is never guaranteed until the underwriting process is finished and all necessary paperwork has been signed by both you and the lender.
Summary
Unfortunately, a mortgage myth can easily stick in your memory and prevent you from pursuing the home-buying process entirely. That’s why it’s so important to be informed about the truth when it comes to the mortgage loan process, qualified buyers, the loan options they have, and the payment requirements. Hopefully, these myths will no longer stand in your way of finding the right mortgage.
Pride Lending can help you find the home of your dreams with the right loan solution. Our team of allies and members of marginalized communities, including LGBTQ+ and BIPOC individuals, is committed to helping everyone, no matter their background, secure financing for their dream home. We will assist you throughout the homebuying process, including matching you to lenders with products that meet your specific needs.
Additionally, we’ll search for assistance programs that will provide extra money to cover your upfront expenses, helping you secure the best rates with the fewest expenses. Whether you’re seeking a primary residence or an investment home, we’re ready to help.
Speak to an expert loan officer today by calling 725-231-0192. A qualified Pride Lending loan officer can answer all your questions about the home purchase process and help you understand how you and your family can become qualified borrowers.
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