If you’re looking to buy your first home, you may be getting lots of advice from everyone. That’s normal. Your mortgage is the largest expense you will ever make and everyone has an opinion. But as you take in advice, avoid buying into these mortgage myths.
1. If You Have Little Or No Credit, You Can’t Buy a Home
We have ways of documenting alternative credit. If you have monthly bills, do you pay them reliably? What monthly bills do you have for which you can document your payment history?
Your rent payments can be documented with a Verification of Rent completed by your landlord, or 24 months of cancelled checks. Your utility bills (gas, electric, cell phone, cable) can be documented with an online history that shows on-time payments. With a bill in hand, a mortgage broker can have his or her credit agency call the service provider to confirm your history and actually include it in your credit report!
Not all lenders accept “alternative” credit, but some do. You may pay a small premium, but don’t let thin or weak credit ruin your dreams of buying a home.
2. Bad Credit Kills Your Chances of Getting a Mortgage
You do need to demonstrate that you have the ability and willingness to pay your debts; that’s not unreasonable. You do that by showing the lender how you’ve handled monthly debt obligations in the past. The easiest way is your credit report, which shows the lender how you’ve done in the past — for better or for worse.
What if you haven’t always been perfect? Any lender can work with a few light bruises, and some lenders not only work with heavily bruised credit, but specialize in it. You may pay a little to a lot more, but if you want to buy a home at least you can. Moreover, a mortgage is a terrific way to rebuild your credit so you can get a better loan later.
3. Pre-Approval is a Guarantee
Pre-approval means that someone has reviewed your documentation and determined that you qualify for the loan you seek, provided the property you find meets the lender’s standards. However, it is based on a snapshot in time and things change. What can change?
Be aware that even with a rock-solid pre-approval in hand, you might not get the loan once you find a home and get your offer accepted.
Your employment can; the moment you receive notice that you are being laid off, you are no longer approved.
Stock markets crash. If you hold stock, your available cash could disappear very quickly.
Underwriting guidelines change. You may be approved for the mortgage program you want under a set of guidelines that exists today, but if they change, so does your pre-approval.
Interest rates could rise before you find a home, increasing your monthly payment beyond what you can afford.
The bottom line: Be aware that even with a rock-solid pre-approval in hand, you might not get the loan once you find a home and get your offer accepted.
4. You Must Pay Your Taxes and Insurance With Your Mortgage
Many folks pay their taxes and insurance with their mortgages. The lender then pays the County Assessor or the insurance company when the bills come due. (This is called an “escrow” or “impound” account.) Some people would rather keep that money in their own accounts and earn interest on it.
If you put 20 percent or more down on your home, an escrow account is not required. Should you do it anyway? It depends on your circumstances and concerns. But you don’t have to if you don’t want to.
5. Student Loans Will Prevent You From Buying a Home
Many folks with high student loan debt believe they can’t buy homes. They might be right, but they might not be. Your total monthly obligations cannot exceed a certain percentage of your gross income. If your debt ratio is still under the ceiling, you’re fine. Also, lenders can now sometimes roll your student loans into your mortgage, reducing your total monthly payments to help you qualify.
6. The Payment on Adjustable-Rate Mortgages Jumps Up
When an adjustable-rate mortgage adjusts, the bank can’t just make up the new interest rate. Your contract defines how it is determined, by taking a market interest rate (index) and adding a margin. Given the most commonly used terms currently, if you had an adjustable-rate loan that adjusted today, your new interest rate would be about 5.000 percent. We don’t know what it will be in, say, five years when your new loan adjusts, but it’s usually pretty close to whatever fixed rate loans are going for at the time.
The amount of misinformation about mortgages is astounding. People who care about you will want to give you advice. Listen, of course, but confirm everything with an ethical, competent mortgage advisor before letting it decide your course of action.