Buying a home can be intimidating. There are fun parts, like rifling through the latest listings, hitting the open houses, and plotting makeovers that will turn a nice house into a dream house, but these high points can be overshadowed by the uncertainty and worry that often accompany the first-time homebuying process.
You can make the experience less stressful by knowing the myths that stress out or downright deter first-time buyers. In the spirit of keeping hope alive for nervous newbies, we’re dispelling the top eight myths.
You Need a 20 Percent Down Payment
While a down payment of 20 percent or more lowers your mortgage and helps you avoid paying for private mortgage insurance, if you've got a good credit rating and steady income you can buy a home with as little as 3 percent down. Your monthly payments will be higher, but if a smaller down payment option helps you get into the market quicker, you’ll start building equity sooner.
You’ll Get a Better Deal Without an Agent
Definitely not. Especially for a first-time buyer, a realtor is an essential piece of the puzzle, giving you vital information and looking out for your best interests. Be smart about finding the realtor that's best for you. Interview at least three candidates, read the realtor's reviews, talk to former clients, and find out if their closed properties are similar to what you’re looking for.
You Can’t Pay for a Mortgage if You’re Paying Off Student Loans
While some first-time homebuyers with student loans have difficulty saving for down payments, lenders don’t look at your total student debt, but rather at the amount you pay each month. The important ratio is what you pay each month relative to your monthly income.
You Need a Perfect Credit Score
Very few have a perfect credit score, so there are different plans with different requirements. Lenders usually want a score of at least 620. If your score is below that, you can take steps to raise it by reducing debt and paying your bills on time. If you don’t have time to boost your credit score, the Federal Housing Administration has home loans for borrowers with credit scores as low as 620. Knowing your score before you apply for a mortgage will give you a better idea of the kind of financing you can expect.
A 30-Year Mortgage is Your Best Option
If you want low monthly payments and plan to stay in your house for many years, a 30-year mortgage may be the right fit. But if you’re buying a first home, you may only stay a few years before trading up. If that’s the case, consider an adjustable-rate mortgage, which delivers a low fixed rate for a set number of years before it adjusts annually to the prime rate. This way you'll enjoy low payments for the initial fixed-rate period before you sell or refinance.
Zero Closing Cost Mortgages are the Best Way to Go
To be perfectly clear, there's no such thing as zero closing costs. Closing costs include things like attorney fees and title insurance, and they typically add between 2 percent to 5 percent of your home’s purchase price. They're never waived, but they can be deferred by wrapping them into your loan and paid with a slightly higher interest rate. While this will save you money up front, it will also cost a little more over the long term.
Private Mortgage Insurance is Too Expensive
This is a little ambiguous. If your down payment is less than 20 percent, you'll be required to take on private mortgage insurance, which protects the lender in the event you stop making payments. Mortgage insurance premiums generally range between 0.17 percent to 1.5 percent of the total loan amount. That shouldn't be a deal breaker as it can provide peace-of-mind by not emptying your bank account to cover a 20 percent down payment. Weigh the costs and benefits carefully.
Low Inventory is Locking Out First-Time Homebuyers
Not true, but the market is competitive. For highly motivated first-time buyers, monitor the multiple listing service (MLS) and be prepared to look at properties the day they’re listed. Other effective strategies include monitoring social media for people preparing to list and using personal letters or other creative methods to help your offer break through. And, of course, it always helps to be preapproved for your home loan; expand your search area; and above all, never give up!
Julio Rios is vice president of Mortgage Lending at UW Credit Union ( uwcu.org ).
Photographs provided by UW Credit Union.
UW Credit Union
3500 University Avenue
Madison, WI 53705