As with many other subjects, there are many misconceptions about mortgages. Some of it has to do with the confusion in the many changes that have occurred since the mortgage meltdown of 2008-2009 and some of it is based on assumptions or conventional wisdom. It is important to separate fact from fiction as you begin to prepare for your mortgage process as doing so will ease frustration and make for a smoother transaction.
1) The Bank always has the best mortgage rates. That is certainly what the bank would like you to think-and sometimes it is even true. However, banks no longer hold the monopoly on great rates and fees. There are many other players in the game including credit unions, mortgage banks, and my personal favorite, mortgage brokers (who have access to money from more than one source). So my advice is to work with the mortgage loan originator who gives you the best service and can deliver what is promised. The fact is, it isn't only about the rate. It also has to do with experience, type of loan and source of money. Most of the time rates are going to be competitive for the same product and borrower profile.
2) My credit isn't so hot, so I have a co-borrower. The days of a well qualified co-borrower being able to lift a borrower with bad credit into home ownership are over. Credit qualifying is determined by the lowest middle credit score of each borrower. If both parties have qualifying scores, the co-borrower may be helpful in an area such as debt to income qualification-but both the borrower and the co-borrower have to be able to qualify credit wise.
3) I know I have to have 20% down which is very discouraging. I will be ready for the old folks home by the time that happens. The 20% rule hasn't been true for at least 31 years (which would have been 1983 when I bought my first home and put 5% down.) The rule for conventional lending is 5% down (though Fannie Mae is bringing back the 3% down conventional loan before the end of this year we are told). FHA requires 3.5% down and USDA and VA are 100% products. The invention of mortgage insurance (paid on a monthly basis in the mortgage payment) is the method by which lenders hedge their bets on the lower down payment requirements. I look at it as paying your 20% over time rather than when you obtain the loan. What is important to remember is that you do not need 20% in savings to buy a home.
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4) I have overdraft protection so NSF checks or debits don't matter. Here is where we have a big generational shift. If a paper check bounces, most everyone knows that isn't a good thing. Not only is there the issue of the creditor not getting their money, there are all the overdraft fees that come along with it. Back when paper checks were in common use you could have as much as $35 per check that bounced charged to your account. A lot of us remember those- playing the float brings back fond memories does it? But with the advent of debit cards and checking account balances in constant flux due to the computerized nature of banking these days, banks have come up with a new service-overdraft protection. If you don't keep enough funds in your checking account, don't worry, you pay a small fee and the bank covers your debit with money from a different account. I have had the under 30 set tell me, "It's okay, my bank doesn't count it against me, they say it is not a problem." Sure, for the bank it isn't. They get to collect a fee every time they "protect" your account. The laissez faire attitude on the part of banks has given folks the idea that they don't need to keep an eye on the balance in their checking accounts-not carefully anyway. Here's the deal-while it may not trouble you that your bank is taking $8 or more every time you over draft (think of what all those $8 fees could buy when you add them up) it does trouble the mortgage lending underwriting world. If someone is so cavalier about their checking account that they don't really watch the balance much, what if the debt that overdrafts is the mortgage payment? If your loan file has some other holes in it such as not much history of saving money or low job time, a few NSF debits can sink the ship. So exercise a little discipline and begin a ledger. Hang on to your receipts and subtract them out of your account. No one's memory is good enough to remember the Starbucks latte they had yesterday, or filling up the tank with gas.
5) I had a foreclosure. So now I have to wait seven years in order to buy a house. Not at all. You are eligible for an FHA, VA or USDA loan three years after the sheriff's sale that took the deed out of your name. Please keep in mind it is the sheriff's sale, not a bankruptcy discharge date that is the determining factor. If your house was in a short sale it is three years from the date of the closing on the house. If you don't know when the sheriff's sale occurred, call the county where the property is located and obtain the sheriff's deed. It is a matter of public record and your next lender may ask for it to validate the date of the deed transfer.
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6) The house I am buying appraised for ten thousand more than I am buying it for. I can use the difference as part of my down payment. No you can't. Lending works off of the sale price not the appraised value. While it is good news that you have instant equity-all it means during the sale is that you have a good buy. The earliest you can access that equity will be 12 months from closing your loan. Fannie and Freddie require that you use the sale price of the property as the value until 12 months have elapsed.
7) I am getting ready to buy a home and have been shopping around for interest rates. I got a great quote from a lender. I am pretty happy I will get that rate on my purchase. Actually, until you have a home under contract you can't count on getting that rate. Interest rates change every day-sometimes more than once a day. Lenders can't lock in your rate until they have an address to marry it to. So if it takes several weeks for you to find and negotiate for your dream home, the rate that you liked so much may be gone. It's not bait and switch, it is just the way the world financial markets work. Which is why I say, rate is a part of the picture, but not the whole story. Find a lender that you trust and they can keep you apprised of what the markets are doing.
8) Where I go to get my government loan doesn't matter because any lender can originate my loan.
Government loans don't roll quite the same as conventional loans and many lenders who don't originate government loans on a regular basis aren't familiar with the ins and outs of the products. In the case of government loans what you don't know about the product can hurt you. For instance, in some circumstances, pre-occupancy is given to a borrower if the property is vacant and the borrower is approved and it appears that the loan is going to close in good order. That isn't a problem with a conventional mortgage product. For FHA loans, it is a huge issue. If the borrower is living in the house at the time of closing, they must have been occupying the premises for 6 months. If they moved in six weeks ago, that will become a problem. The government loans have some nuances that conventional lending doesn't. If you are using an FHA, VA, or USDA loan-be sure your lender specializes in those types of loans. It may mean the difference between approval and denial.
9) I want to buy a house in a few months so I am closing my credit card accounts so my credit looks better. NOOOOOOOOOOOOOOOOOOOOOOOOOO! Please do not close your credit card accounts! For one thing, closing your cards will lower your score. Revolving credit is the most powerful item for good or bad on your credit report. If you feel that you need to pay some accounts off, please do so, but do not close the accounts. You will need a minimum of three accounts open and they can be a student loan, a credit card, and a car loan if you wish, but do not start closing accounts prior to purchasing a home.
10) My credit isn't particularly good, but I have quite a bit of money to put down so obtaining my loan shouldn't be a problem. Here is one big change between then and now. Seven years ago you needed either money or credit to purchase a home. The ensuing changes have made the credit part of that equation much more important than the money. If you have not established much credit but what you have is good, a solid down payment can help. But if you have poor credit, it doesn't matter how much you put down. Money doesn't cure all as it once did.
So there you have it, the ten mortgage myths that I have encountered the most recently. As always, if you are considering purchasing a home, get your pre-approval house in order prior to writing an offer on a bricks and mortar house-be sure of where you stand.
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