Buying a home is a major life event, filled with significant decisions. From finding the right home to deciding on the home loan answer that is right for your situation, it is also one that relies on having the most information possible – and ensuring that the information you have keeps you on the right path.
Mortgage loans, however, can be mysterious or confusing to both first-time home buyers and those with experience, so demystifying some of the common myths can help you stay ahead of the game and on track for the best outcome possible. Here are some of those common myths about mortgage loans, and the facts behind the truths:
At one time, a 20% down payment was the gold standard. However, times have changed. Today, many people are trying to pay off student loans, rents are going up, and salaries aren’t increasing as fast as they did in the past. As potential home buyers found it more difficult to save large down payments, the mortgage industry responded.
In fact, the National Association of Realtors (NAR) discovered that people who financed a home in 2019 put an average of 12% down on their mortgages. Some conventional lenders may still require 20% down payments. But, many other alternatives range from 0% down mortgages from the USDA to 3.5% down payment plans from the FHA.
When you see statistics about home loans, you’ll often see charts titled, “Today’s Rates.” That doesn’t mean that all lenders are charging the same finance rates; it is just an average of what various lenders are using that day. The most important thing to know is that different lenders have very different business models.
Most lenders differ in terms of what they charge to process a mortgage loan. Traditional lenders can charge various origination and settlement fees, but digital lenders operate with lower upfront costs and faster processes, which opens the customer up to more possibilities of receiving lower fees and interest rates. While many brick-and-mortar lenders have large organizations with lots of red tape, modern digital options offer services like eClosings, on-demand approvals, real-time loan options and lower upfront costs for a fast, easy and convenient customer experience. When choosing a lender, you should choose just as carefully as you do your new home.
One of the best things you can do for yourself before you get serious about looking at homes is getting an idea of the size of mortgage for which you’ll qualify. You may want a $500,000 mortgage loan, but don’t look for that type of a home until you know you’ll be able to finance it. There are two alternatives for obtaining that information. Pre-approval and pre-qualification aren’t the same thing!
But, if you’re placing an offer on a home along with other potential buyers, the Pre-Approval is going to make your offer much stronger than the other buyers who offer only Pre-Qualification.
Don’t forget the buyer’s portion of the closing costs, ranging from 3-4% of the purchase price of a home. So, if you are going to buy a $300,000 house, the closing costs could run from $9,000 to $12,000. And, that’s in addition to your down payment.
This is another reason why you need to choose your lender carefully. Some closing costs are unavoidable. For example, you’ll typically need to pay for a home appraisal and title search. Some lenders are successful at helping you avoid lots of closing costs, so make sure you compare how lenders calculate closing costs.
It’s not true that a high salary will ensure you get a loan. Lenders also look at your credit score and how much debt you have. Lenders will talk to you about your Debt-to-Income (DTI) Ratio. That ratio tells a lender how easy it will be for you to pay your mortgage every month.
If your DTI Ratio is 15%, you only need 15% of your gross income to pay off debt each month. Each lender will have a set DTI Ratio that they’ll look for to offer you a mortgage.
Discover Lending That Gives You More
If you’re thinking about buying a new home, contact Wyndham Capital Mortgage for an excellent user experience, lower costs, zero hidden fees, and high financial flexibility. Our skilled loan officers can help you find the right loan option for your specific goals and financial situation.
Discerning fact from fiction and managing your expectations are sure to help you become a satisfied homeowner. Turn to experts for their professional knowledge, and give yourself plenty of time to make the right decision.