8 Home Buying Myths You Need to Move Past
Buying a home is expensive. Now isn't a good time to buy. Maybe there’s some truth to these scary home buying myths. Or, maybe they’re voices in your head discouraging you from what's possible. Either way, there are home buying myths people relate to when maybe they shouldn’t.
Move past these eight 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 make a 20% down payment. 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.
Apply for down payment assistance. Check with state and local agencies. They can offer grants or loans. And, you don’t have to be a first-time home buyer to qualify!
Use gift money. Just as it sounds, it's money you receive as a gift. Be sure to properly document gift money through financial records. You'll need to provide copies of your recent bank statements, your donor’s recent bank statements, and cashier’s checks.
Go with mortgage insurance. Mortgage insurance can increase your purchase power and allow 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).
Home buying fact: A down payment may seem like the only way to get a competitive interest rate or low monthly payment, but it’s not. Things like credit history, income, and debt affect your loan program (and ultimately payments), too. Find success by calculating how much you can afford. Better yet, speak with a dedicated 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 RENTCafe, the national average rent reached $1,430 in March 2019. It’s an increase of 3.2% year over year.
So, before you write off becoming a homeowner, 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. If you buy a home in Austin (after three years), that home will have $138,525 in equity (available to you when you sell). However, if you rent and invest your down payment; 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!
Home buying fact: renting doesn't offer a lot of cost savings. 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
The news often reports about “interest rates on the rise.” But what you need to ask is: on the rise from what? Talk to any housing economist about mortgage rates, and you’ll hear they’ve been abnormally low since the housing crash.
A NerdWallet article from February of 2018 published a quote from Dean Baker, senior economist and co-founder of the Center for Economic and Policy Research. Baker said, “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.”
Home buying fact: current rates 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 love, don’t wait long for a lower rate.
4. You have to pay your student loans first
There's no question that millennials have unique financial preferences. 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 that 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. That debt can be excluded from your debt-to-income (DTI) ratio.
Maybe you’re on an income-driven repayment plan. Prior to this change, lenders would calculate one percent of your loan balance. But now, they can use your existing payment, as long as it isn’t zero. This could be the difference between mortgage approval and denial.
Home buying fact: having 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 will build equity. That equity can eventually be used to pay off high-interest debts like student loans, personal loans, or 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 to be perfect
Your credit score does not have to be perfect to buy a home. Though keep in mind, If your credit score needs work to buy a home, chances are it needs work to rent a home.
According to a Rent Cafe study, the average credit score for renters in San Francisco was 724. Those rejected from renting had a 611 score. Boston is even tougher, with an average approved score of 737 and an average rejected score 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.*
*NOTE: FHA, VA, Conventional, and USDA loan requirements are subject to change. Jumbo and non-QM loans may be temporarily unavailable. As a result of COVID-19, mortgage investors are unable to support as many loans, meaning underwriting guidelines for government and conventional loans are becoming more strict.
Home buying fact: poor credit challenges both renters and homeowners alike. Work on strengthening your credit. 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.
6. All lenders are the same
Rates and fees vary based on the lender. Some charge upfront fees, others don’t. Some pay their employees a commission (resulting in an added cost to you), while others don’t. Do your research. You may even find that some lenders have access to down payment assistance or local loan programs that can provide thousands in savings.
Home buying fact: The best lender is going to take the time to get to know you. They will take your financial needs and goals into consideration. We recommend researching your options and making time to ask your lender specific questions before moving forward.
Learn the difference between Mortgage Brokers (vs) Direct Lenders
7. The listing price is just a suggestion
In highly competitive markets, don’t set your heart on a home that is on budget or above budget. Sometimes, you need to offer more than the asking price to compete. If you’re looking in Seattle or Denver, and your budget is $450,000, you may need to start looking at $400,000 homes and see where it takes you.
Home buying fact: Real estate agents know their markets. A good real estate agent can help you stay within budget and guide you through making the right offer.
8. Fall and winter are bad times to buy
Many people think that spring is the best time of year to buy, but the reality is — too many buyers competing for limited housing can drive up prices. Score a better deal by buying during the off-season. According to MarketWatch, inventory for starter homes peaks in October. More inventory means less competition, and therefore more time to do inspections and consider the home before putting an offer on it.
Home buying fact: You face less competition in the fall, and you may be able to move more quickly because sellers are looking to close the deal fast.
You’re off to a great start now that you’ve dispelled these home buying myths. Take the next step by calling 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.
Stop renting, and get started on your path to homeownership today!