In the world of mortgages, it’s normal to feel like you’re lost in a sea of confusing acronyms and bank-ish lingo. And since securing the right mortgage isn’t exactly something you want to “wing,” it’s a really good idea to head off your biggest questions at the pass. Let’s clear up some of the most common misunderstandings that come with financing a home so you can land your loan with the confidence of a mortgage Mr. Miyagi.
Misunderstanding #1: I should start the mortgage process AFTER I’ve found a home.
Many home buyers wait to start mortgage shopping until after they’ve found a home they love, and they’re ready to make an offer. But when you go this route, you might find yourself in a situation that slows down (or even prevents) your home purchase. Maybe you’re in a completely different financial situation than you originally thought. Maybe there’s an issue with your credit report you could have already sorted out. Maybe you can’t get your pre-approval documents together fast enough — things like recent bank statements, copy of your tax return, etc. — and someone else gets an official offer in before you.
In reality, getting pre-approved BEFORE you shop is one of the most vital steps in the entire home buying process. Doing the work to secure a pre-approval upfront will save you time and headaches when it matters most.
You’ll have a better understanding of your own financial situation, what loan option is right for you, and how much home you can afford. Not to mention, with many lenders, your mortgage pre-approval typically lasts for 90 days. So even if you’re just getting started, getting pre-approved early means you’ll be ready to buy the moment you find a home you love.
Misunderstanding #2: The purchase price determines my monthly mortgage payments.
Let’s say you’re qualified for a mortgage of $300,000. Many buyers assume that this means they’re all set to buy a $300,000 home, and their monthly loan payments will reflect that purchase price. Well, it’s not quite that simple. When you think in terms of purchase price instead of mortgage payment, you overlook all kinds of costs that could impact your monthly housing expenses. For example, property taxes and homeowners insurance can vary greatly depending on the property type and where your home is located.
When comparing homes, you should consider what your total mortgage payment would look like, not just the purchase price. Your lender can help you figure out what to expect for things like property taxes and homeowners insurance, which will likely fluctuate over the life of the loan. Think through other possible costs that could be tacked on to your monthly payment too, like homeowner’s association (HOA) dues. The bottom line? You can avoid unnecessary budget surprises later by planning for your ideal monthly mortgage payment now.
Misunderstanding #3: Stellar credit score = stellar rate.
Yes, a higher credit score can often mean a better interest rate. But when a lender reviews your credit report, they’re actually looking at many other factors than just your score. Perhaps the most important of all? Debt. The number one reason buyers are denied financing is high Debt-To-Income Ratio (DTI). In easy-to-understand terms, DTI is a finance formula that basically compares your monthly income to your monthly debts, such as car payments or student loans. So, when you think about it, it’s quite possible for a buyer to have a great income and credit score, but too many debt obligations compared to their qualifying income.
Remember, a stellar credit score isn’t everything. Be proactive about pulling your credit and have a Loan Specialist review it with you. This is something you don’t want to (or have to) tackle on your own. A seasoned mortgage pro can help make sure your credit report is accurate, they can tell you your exact Debt-To-Income Ratio, and they can guide you toward the best rate and loan option for your individual financial situation.
Misunderstanding #4: The bigger down payment the better, right?
At some point, you’ve probably heard the “golden rule” that a 20% down payment is required when you buy a house. And for many potential home buyers, the idea of coming up with a chunk of change that size makes the dream of homeownership seem like, well… only a dream. But we have some game-changing news for modern home buyers: The golden rule of 20% down isn’t the golden rule anymore. It’s an outdated concept from a bygone era of home buying (cue collective sigh of relief).
The truth: Today, anything is possible — 10% down, 3% down, or even 0% down. Whether you’re a first-time home buyer or you’ve been through it before, an affordable down payment is more attainable than you think. If you need to buy without a down payment, you should look into government-backed zero-down programs like the US Department Of Agriculture (USDA) Loan, or for military families and veterans, the US Department Of Veterans Affairs (VA) Loan. There’s also the commonly utilized FHA (Federal Housing Authority) loan which has a minimum down payment requirement of only 3.5%. Not eligible for any of these programs? No worries. Depending on where you’re at financially, many Conventional lenders will approve you for a mortgage with a down payment as low as 3%. Yeah, sure sounds easier than emptying out your savings account.
Moral of the mortgage story? It’s easier to understand than you think.
Finding your way through the financing process is a notoriously tricky part of buying a home — especially if it’s your first time. But now that you know which major mortgage misunderstandings to look out for, you have a much clearer path ahead than most. Just remember when the acronyms do get your head spinning, you’re not expected to have all the answers. Because you’ve got an endless stream of resources and people here to help guide you through. And just like that, the student has become the master.
This article is meant for informational purposes only and is not intended to be construed as financial, tax, legal, real estate, insurance, or investment advice. Bungalo always encourages you to reach out to an advisor regarding your own situation. *Same day pre-approval is contingent upon receipt of your required documents.