Home Buying Myths and Facts: Debunking Commonly Held Misconceptions
Misinformation about home buying is about as American as apple pie. Standards change from one decade to the next, which leads the experienced to provide a different and often inaccurate vision of homeownership to people looking to break into the market. With an ability to distinguish between myths and facts, would-be home buyers can get ahead of their peers with real estate if they realize that buying a home is far more accessible than a lot of people make it seem.
Myth: I Need a Huge Down Payment
The rule that buyers need a 20 percent down payment to buy a home is so pervasive that it borders on discrimination against incoming homeowners. Sure, paying 20 percent down to get a mortgage was once fairly standard when homes cost a few-thousand dollars and wages kept up with inflation. The truth is that plenty of lenders are currently happy to provide mortgages to applicants who can make a lower down payment, even as low as 3 percent (or in some cases, nothing).
There are several options for prospective home buyers who can't afford the traditional 20 percent down payment, many backed by the U.S. Federal Government. By guaranteeing a part of the loan to lenders if the buyer defaults creates an opportunity where prospective home buyers can qualify to buy a home when they might not otherwise have been able to. A few of the most common loans are as follows:
- FHA Home Loan: This loan was offers homeowners the chance to purchase a home with a down payment as low as 3.5 percent and a lower credit score than would traditionally be required. Buyers are required to pay PMI over the life of the loan, but it creates a more accessible starting point for buyers who can't save up for a full 20 percent down payment.
- USDA Rural Development Loan: This loan was designed to help lower-income families afford homes and to develop rural areas. USDA loans have strict requirements for income and household location, but buyers can purchase a home without any down payment at all, saving potentially thousands of dollars in up-front costs. Buyers are again required to pay PMI.
- VA Home Loan: The VA Home Loan was developed as a part of the GI Bill, and it gives veterans possibly one of the most favorable and powerful options for home buying loans. VA loans require no minimum required down payment, have no restriction based on location, allow buyers to qualify for a home with a lower-than-traditional credit score, and often boast lower interest rates compared to other loan options. They can also be reused indefinitely, allowing veterans to utilize their benefits again and again.
These loans offer several versatile and powerful options for those who want to purchase homes but are held back by the difficulty of saving up for a traditional down payment. They give buyers the power to achieve their goals by lowering the barrier to entry.
Additional options include new businesses that aim to help with down payments.
Myth: I Can't Qualify Alone
Although having two incomes on an application is certainly useful, it is hardly necessary. The idea that buying a home with a partner is the only way to buy a home went out with disco music and low college tuition. These days, standardized underwriting guidelines rule much more than a loan officer's personal comfort with an applicant. This means that one borrower with a solid income, good credit history, assets in reserve, and a stable future is just as likely to get a mortgage as a couple with the same qualifications.
Myth: All Mortgages Are the Same
A lot of people with a decent income and credit could probably qualify for a mortgage. What matters is the type of mortgage that a lender offers. There are different types of mortgages with varying lengths for the term, with two being the most popular:
- Fixed-rate mortgage: A fixed-rate mortgage is one where the interest rate on a home loan stays the same throughout the entire life of the loan. This can be valuable for homeowners who purchase during a period with low interest rates, because they can lock into them until their home is paid off or they refinance.
- Adjustable-rate mortgage: An adjustable-rate mortgage has an interest rate that changes annually to reflect the current rate of interest year to year. Though this mortgage type is riskier, buyers are often offered a lower interest rate than with a fixed-rate mortgage to compensate.
Lenders might present varying mortgage options to an applicant, letting the borrower decide which one works best for them. Applying to different lenders helps to ensure that an applicant gets the better options available.
Myth: My Credit Has to Be Super High to Qualify for a Loan
Having good credit is important to a mortgage application, because it shows the lender that the borrower is prepared to handle a large, long-term debt. However, this does not mean that a person's credit score has to be absolutely perfect to even qualify, as mortgage application is only one of the first steps to buying a home. Very good or exceptional credit scores may be associated with greater loan options and lower interest rates, but those with fair or good credit scores could still qualify, giving more people the chance to get ahead financially with real estate. Lenders approving loans guaranteed by the Federal Housing Administration (FHA) may allow applicants with a credit score of 500 or higher.
Myth: A Mortgage is Always More Expensive Than Rent
People tend to focus on the price of a home as if it is always going to be more expensive than renting. However, the average cost of rent in any given area is dependent on more than just the cost of housing. High demand could make rent equal to or even significantly more costly than buying a home. People who are willing to make a few concessions in the name of having a housing investment could find that the price of a mortgage isn't much more than rent.
One of the reasons mortgages can seem so harrying is that there are several components that make it up. Homeowners have to pay property taxes, pay for any maintenance or repairs, the mortgage itself, and—if they put less than 20 percent down—private mortgage insurance. That's on top of all the other expenses they would have to pay as renters, such as utilities and insurance. Still, depending on both the housing and rental markets in an individual city, renters can find houses that are comparable in price even after additional expenses, making transitioning from renter to homeowner a realistic possibility.
Myth: Millennials Aren't Buying Homes, and Many Simply Can't
People in their 20s and 30s have had a slightly harder start in adulthood given the high costs of education and a slowly recovering economy. That said, plenty of people in this age group are buying homes, and they are now the largest segment of the home buying market. A bit more flexibility in lending has made it much easier for younger adults to qualify in recent years and discover the benefits of Millennial home buying.
The belief that millennials aren't entering the housing market at the rate they should can largely be attributed to the economic crisis of the late 2000s. However, where statistics indicate that millennials are buying at a slower rate, so are all other age groups across the board. If millennials are buying fewer houses than their parents' generation, it has less to do with the behavior of millennials and more with the sluggishness and slow recovery of the housing market. Fortunately, there are many options for first-time home buyers.
Myth: Millennials Only Want to Live in Cities and Shun the Suburbs
Living in an urban area is ideal for many, but it is far from necessary. Many urban areas, such as San Francisco or New York City, feature high housing prices that are harder to reach without owning another home first. The truth is that people in their 20s and 30s are about equally likely to live in a city or suburb. It simply depends on what they want from the property.
It's easy to get pessimistic about the home buying process when there are so many myths about what a person has to do to get a mortgage. Don't fear the down payment. Don't let your DTI get too unbalanced. People who are ready to buy homes may be able to get them far more easily than they thought possible, due to reasonable requirements and low down payment options.