For most people, purchasing a home is equal parts excitement and fear. You have likely heard all the different do's and don'ts of purchasing a home, but you should realize that many mortgage myths simply aren't true. If you want to feel confident as you purchase a home, be sure to know the truth about some of the most common myths.
1. Getting pre-qualified is the same as getting pre-approved
Getting pre-qualified is not the same as being pre-approved. Pre-qualification is a quick and easy process that gives you an idea of what you can afford based on unverified assumptions. Pre-qualifying is like creating a mental ballpark of how much you can afford. Being pre-qualified for a loan doesn't guarantee the loan, nor is it a final approval from the bank.
Pre-approval, on the other hand takes the assessment much further, and also lets sellers know you have done your financial homework. Pre-approved provides you with the loan amount you can receive, as long as nothing changes on your credit report before final approval. Whereas pre-qualification provides a general posture of readiness based on assumptions, pre-approval involves a seriesIt is a more involved process where the lender proceeds to confirm and verify:
- Proof of Identity
- Proof of Income
- Proof of Assets
- Credit Verification
- Employment Verification
- Debt Statements
- Other Documents
While a little more demanding, pre-approval is strongly recommended and offers many advantages to the prospective buyer. It allows you to begin the mortgage process in earnest by beginning to gather and prepare documents that will need throughout the process. Pre-approval also puts you in a the best position when negotiating or making an offer on the home of your dream.
2. Shopping around for lenders will hurt your credit score
You are allowed to shop around for a mortgage without any significant impact on your credit. Multiple checks from mortgage lenders will be reported as a single inquiry within 45 days. Even in situations where a lender must check your credit after that 45-day window, shopping around might still be worth the small impact on your credit rating.
3. You must have a high credit score
You don't have to have a flawless credit score to find a mortgage that works with your budget. While your credit history impacts if you are approved for a loan and your interest rate, having a credit score of 800 or higher is not required. Today you can find several mortgage programs available for individuals with lower credit scores.
4. You can't be in debt and buy a home
You don't have to be completely debt-free to purchase a home. While it is smart to work and lower your debt-to-income ratio before applying for a loan, it isn't necessary to have no other debt. You can still get a loan for your home purchase.
5. You need to put 20% down
This is probably one of the most common myths about purchasing a home, and to set the record straight – it's not true. If you qualify for a loan, you may find financing options with minimal down payments. There are even options where you make no down payment at all. Some first-time homebuyers are surprised to find out that people who currently own their home put much less down than the standard 20%. While there may be some disadvantages to not putting 20% down, they are not as serious as you may believe.
6. You should always get a 30-year fixed mortgage
Most homebuyers choose the 30-year fixed-rate mortgage. While this is considered standard, it's not right for everyone. In fact, opting for a 15-year mortgage may be a smart option. While the payments will be higher, the overall cost of the loan is less. As you can see, many mortgage myths are floating around. Knowing the truth will help you be more prepared for your home purchase.