First-Time Buyer Mortgage Myths
It’s an indisputable fact that buying a home today is a complicated process. It can be especially intimidating for a first-time buyer. Also, there is a severe shortage of inventory in the category of entry-level homes making the transition into homeowner a challenge. The process is not as simple as searching for a house, finding one that suits you, making an offer and going to closing.
Although these are indeed the basics, it is not the complete picture. There are a lot of pesky details that are not understood and become fertile ground for the seeds of mistaken beliefs. The topic that seems to represent the most confusion is obtaining a mortgage. Let’s take a closer look at some of the most common myths about mortgage eligibility.
I Need a 20 Percent Down Payment
No, you don't. Although a buyer needs to put 20 percent down on a home to avoid paying Private Mortgage Insurance, most can buy a house with much less money. When you look at a snapshot of all buyers, the medium down payment is 10 percent.
You can find lenders who will approve mortgages as low as 3 percent for well-qualified applicants. Another option is a loan from the Federal Housing Administration if your credit score is not good enough to get an approval on a conventional mortgage with a low down payment. If you have served in the military, the Veterans Administration has zero down options.
Qualified Veterans can score a mortgage from the VA with no money down. You must pay closing costs but can ask the seller to pay for them. If they refuse or will only pay a portion, you can use money gifted from a relative.
If you qualify for an FHA loan, your down payment can be entirely gifted no matter what the percentage. If you don’t have a generous relative to help you out, there are also downpayment assistance programs available for first-time buyers. When it comes to closing costs, you can negotiate with the seller to cover up to six percent.
With a conventional mortgage, you can receive the entire 20 percent down as a gift. However, anything less than that amount cannot be completely gifted. The mortgagee must come up with a portion of the money. You can also work with the seller to pay up to 3 percent of the closing costs and then roll the remainder into the loan. You can also finance all the closing costs if necessary.
It is also worth noting that conventional mortgages may not work as well for first-time buyers because you can not use down payment assistance programs with them as you can with an FHA loan. So why even consider conventional loans? They do not require as much documentation nor have as many restrictions on acceptable properties. This means you can get to closing more quickly. Many sellers often prefer a buyer who will be using conventional financing and in a market that favors them, it makes you as a buyer more competitive to go that route.
My Credit Score is Too Low
It is a myth that excellent credit is necessary to get a home loan. However, your creditworthiness is, beyond doubt, a factor. The higher your score, the better the terms a lender will offer. With very good or excellent credit you will be able to qualify for the lower down payment and lower interest rate.
For instance, the typical score required to get a VA loan is 620. However, the VA doesn’t have any set in stone guidelines, and you can find some lenders that will go as low as 580. FHA guidelines are more forgiving than other loan programs. You can get an approval for a loan with a score as low as 500, but you should anticipate a 10% down payment. At 580 or above, you can qualify with 3.5 percent down.
Conventional Mortgage minimum credit score requirements vary by lender, but a rule of thumb is they need to be at least 620. Again keep in mind, more with conventional financial institutions the higher the score, the lower the interest rate and the better the terms you will be eligible to receive.
I Have Student Loans so I Can’t Get a Mortgage
Over 86 percent of Millennials who do not own a home feel that student debt is holding them back. The most common reason is too high a debt to income ratio. However, if your income is high enough, even with student debt, you can qualify for a mortgage.
About 20% of homeowners today do carry student debt. The outcome of your home buying story all depends on that significant number called a debt to income ratio. Again, those ratios are flexible, and they vary depending on the lender and the loan program.
Debt to Income Ratios
For the VA the typical DTI ratio is 41%. However, under specific circumstance, it can be higher depending on your credit score, your down payment, the number of reserves, high net worth and your increased opportunity for a higher income.
FHA guidelines for DTI can be as low as 36% or as high as 50% depending on other criteria. In most cases, it should be around 41%. Conventional loans with good credit and an adequate reserve account, you could be allowed a mortgage with a DTI as high as 50%, but the norm is 43%.
Rethink the Impossible
So if you want to be a homeowner but have been holding back because you thought you didn’t have enough money saved, had too low a credit score, or too much debt due to student loans you should do a reevaluation. If you think you can, talk to a mortgage professional.
However, if you need to save more money, check out some of our suggestions for easy savings. Should you need to increase your credit score, I found this great article to help you boost your score 100 points in 30 days. If it’s all systems go, you can get some great buyer to advise from other articles on our blog and please reach out to our team with any questions.