5 Home Buying Myths You Need to Move Past
Buying a home is really expensive. Now is not a good time to buy. Is there any truth to these scary home buying myths? Or, are they just voices in your head discouraging you from what really is possible? Either way, there are home buying myths many renters relate to...when maybe they shouldn’t.
Move past these five home buying myths and start seeing just how affordable homeownership is!
1. You need to make a 20% down payment
No, you do not have to put 20% of the home purchase price down. Times have changed and there are loan programs designed with first-time home buyers in mind. Even if you are ready to make a large down payment, it still may be in your best interest to weigh all options. Some of which include:
Apply for down payment assistance - which is offered through a number of different state and local agencies as well as public and private sponsors. They can be grants or loans. Either way, they offer great incentives to become a homeowner. You don’t even have to be a first-time home buyer to qualify!
Use gifted money - which is exactly what it sounds like: money that is gifted to you. Keep in mind funds must be properly documented through financial records. So, be prepared to provide copies of your recent bank statements, your donor’s recent bank statements, and copies of cashier’s checks.
Go with mortgage insurance - which is sometimes considered a mortgage swear word. After all, it seems so unnecessary. That’s not the case, though. Mortgage insurance can be beneficial, as it increases your purchase power and allows you to keep your hard-earned money in savings. Plus, if you choose a loan program with private mortgage insurance, it can be canceled once you reach a certain loan-to-value (LTV).
Bottom line: A down payment may seem like the only way to get a competitive interest rate or a small monthly payment, but it’s not. Things like credit history, income, and current debt affect your loan program (and ultimately payments), too. You’ll find the greatest success by calculating how much house you can afford or monthly mortgage payments. Better yet, get an even more clear picture of what you can afford by speaking with a salary-based mortgage consultant. This way your needs are top of mind, and there’s no pressure.
2. It’s cheaper to rent than own
There may be some truth to this in the short term, but if you plan on renting for a couple years or more — it’s in your best interest to look into a home purchase. That’s because mortgage payments are stable (when you choose a fixed-rate), whereas rent can rise annually.
According to data from Yardi Matrix and Apartment List, the national average rent reached an all-time high of $1,405 in June of 2018, and it’s the fifth straight month of increasing rents.
So, before you write off becoming a homeowner because you think it’s too expensive, do your research. You may be surprised by the results you receive from a rent vs. buy calculator.
Let’s consider Austin (using data from the rent vs. buy calculator above). After 3 years, if you buy a home in Austin, that home will have $138,525 in equity (available to you when you sell). However, if you rent and invest your down payment (and the other saved money), at a 6% return rate it will earn around $13,491 in 3 years. Meaning, you just gave up over $100,000 that could have been part of your personal wealth!
Bottom line: there isn’t a lot of cost savings when it comes to renting, so why not invest in something that can increase your wealth? There are many first-time home buyer assistance programs available to get you started.
3. Interest rates are on the rise
“Interest rates are on the rise.” It's a common headline in the news media, and it can scare home buyers into thinking it's too expensive to buy a home right now. But what you need to ask is: on the rise from what? Because the reality is, they’ve been abnormally low since the housing crash.
Dean Baker, senior economist and co-founder of the Center for Economic and Policy Research, was quoted in a February 2018 Nerdwallet article saying, “I remember in the mid-’90s, getting a 7% rate, being happy with that. The rates we’re looking at today are still, by any measure, pretty low. So it’s basically the economy getting back closer to normal.”
Bottom line: current rates are a sign of the economy getting stronger. The rates you see today may rise or fall for a variety of reasons, but not by much. If your finances are in order and you’ve found a home you’re in love with, don’t wait long for a lower rate. The minor monthly savings won’t make a big enough difference.
4. You have to pay your student loans first
A 2017 National Association of Realtors (NAR) study stated that 80 percent of millennials do not own a home. Of those, 83 percent say it’s because student loan debt is holding them back.
It’s true, millennials face a higher student loan burden than any generation before them. However, there are new guidelines that make it easier to qualify for a mortgage with student loans.
That’s because Fannie Mae — the largest purchaser of residential mortgages in the U.S. — has changed the underwriting rules around student loans to make qualifying for a mortgage easier.*
- Say your parents or employer are paying your student loans, then that debt can be excluded from your debt-to-income (DTI) ratio.
- Say you’re paying your own student loan debt, but are doing so via an income-driven repayment plan. Prior to this change, lenders would calculate 1 percent of your loan balance in place of what you were actually paying. But now, they can use your existing payment (so long as it isn’t zero). This could mean the difference between mortgage approval and denial.
Bottom line: having some sort of student loan debt could be in your favor. It may improve your DTI so you qualify for a better loan program or interest rate. Though it may seem overwhelming to add on any more debt, you have to remember — your home is an investment that is building equity. That equity can eventually be used to pay off high-interest debts like student loans, personal loans, or even credit card debt.
*New guidelines mentioned above are specific to Fannie Mae programs and do not apply to FHA, VA, CHFA loans, etc. Be sure to consult with a loan officer or mortgage consultant to learn more about student loan debt and DTI ratio as they relate to mortgage approval with your specific loan program.
5. Your credit score needs work
If your credit score needs work in order to buy a home, chances are it needs work in order to rent a home.
According to a Rent Cafe study, the average credit score for renters who were accepted in San Francisco was 724, while the average credit score for those who were rejected was 611. Boston is even tougher, with an average accepted score of 737 and an average score for tenants who were rejected of 667. Now compare this with what it takes to buy a home. FHA loans allow credit scores as low as 600 and down payments as low as 3.5 percent.
Bottom line: poor credit challenges both renters and homeowners alike. Work on strengthening your credit, and when you feel it’s getting healthier, consult with a lender that doesn’t pay its employees a commission. That way, you’re getting guidance into the right loan program and you’re living in a place of your home — so you don’t have that annual competition like you may experience when renting.
You’re off to a great start now that you’ve dispelled these home buying myths. Take the next step by calling the salary-based mortgage consultants at American Financing. We can walk you through loan programs and can help you get mortgage pre-approval, which will give you a clear idea of how much mortgage you can afford. We can even connect you with a local, award-winning real estate agent.
Stop renting, and get started on your path to homeownership today!