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By Amanda Hargrove
Amongst its impacts, COVID-19 unleashed a torrent of home-buying in 2020. The trend towards home ownership shows no signs of slowing, thanks to forces like the rise of remote work, a pandemic-induced desire for more space, and the fact that more Millennials are reaching 30—prime home-ownership age.
But finding a mortgage can be daunting for first-time buyers as well as current homeowners who haven’t shopped for one in recent years. Myths and misconceptions abound, from outdated notions about down payments, to confusion about interest rates, credit scores and more.
To support you on this crucial part of the journey to home ownership, we’ve rounded up six myths about securing a mortgage—and busted them, as follows:
Busted: Traditional mortgage lenders used to require 20% down, but now many options exist for low to no-down payment mortgages. Just be sure to weigh the pros and cons of a lower down payment, as it can affect other terms like closing costs, rates, monthly payments, insurance, and equity vs. liquidity.
Busted: You can probably always get a loan, but you may not get a preferred rate if your credit score is in the 560-660 range. Government programs in particular can be more lenient on credit scores. Plus, your low credit score may be offset by other elements of your credit profile, like little to no debt. If you’d like to improve your credit score, check out these tips and tricks.
Busted: Mortgage lenders don't look just at your income; they also consider your assets, down payment, and liabilities and obligations, such as auto loans, credit card debt, child support, potential property taxes and insurance, and credit rating.
Busted: Although the terms are often used interchangeably, there are important differences between prequalification and preapproval. Prequalification is when your lender offers an informal estimate of what you can afford based on initial information you provide. A preapproval is more precise, and is based on thorough documentation like recent paystubs and W-2s.
Busted: While it’s true for borrowers that the lower the interest rate, the better, the interest rate doesn’t account for the full picture of your costs. The annual percentage rate (APR), however, does include ancillary costs, like documentation and closing fees. Plus, while rates are trending slightly higher over last year’s all-time lows, they’re still remarkably lower than in years past (we’re looking at you, 1980s, when homeowners faced rates between 9-18%).
Busted, partially: With some conditions, it may be prudent to shop around for the lending partner who can offer optimal terms. True, when you submit a mortgage application, each lender will run a credit check, which results in a “hard inquiry” and could lower your score. But if you apply with different lenders within the same 14-day period, it generally counts as a single hard inquiry—meaning it doesn’t hurt to shop around for the right lending partner within that timeframe.
Buying a home doesn’t just take money; it also takes determination. With more clarity on the mortgage process—and fewer myths to cloud your thinking—you can take heart knowing you’re one step closer on the path toward buying the home of your dreams.
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