8 myths of modern mortgages every home buyer should know
To get you started, Michigan Schools & Government Credit Union (MSGCU) identifies 8 myths of modern mortgages every homebuyer should know:
Myth 1: “With my mortgage pre-qualification, I can shop with confidence.”
Not exactly. A mortgage pre-qualification is not a pre-approval. Sometimes lenders offer pre-qualification to quickly estimate what you can afford however there’s no guarantee it’s accurate.
To shop with confidence, get a mortgage pre-approval. You’ll supply proof of income, assets and credit to receive a letter from your lender that states your approved loan amount. In other words, you’ll have what MSGCU calls a “true pre-approval.”
Mortgage Production Manager Bryan Genovich explains why this is so important, “In this market, buyers are going up against multiple offers day one. By doing the work upfront — getting everything in order with a true pre-approval — buyers are ready to make a compelling offer when the house they want becomes available. It becomes a competitive advantage.”
Myth 2: “Without an excellent credit score, I won’t get a mortgage.”
Even with a lower score, you have options. The minimum credit score for a conventional mortgage is 620. For a Federal Housing Administration (FHA-insured) loan, the minimum score is 600. There are many factors other than credit score that are considered in the decision process.
Myth 3: “I’ll need a down payment of at least 20% to buy a home.”
In some cases, you can put as little as 3% down. While a larger down payment will lower your monthly payment and help avoid private mortgage insurance (PMI), it is not a must to get a mortgage.
Myth 4: “Renting a home is cheaper than owning.”
Not really. When you’re an owner you have a home and an asset that increases in equity and value over time. Even if renting offers a less expensive monthly cost in the short term, it offers no equity growth or opportunity to own a valuable asset over time.
Myth 5: “Mortgage rates are the most important factor to consider.”
Mortgage rates are influenced by the Federal Reserve and U.S. Treasury notes and bonds. They’re important, of course, however fees count too. A common tactic to get your business is for a lender to offer a lower rate for an added fee. Net/net: look at the total cost of a loan to make a more informed decision.
Also, it’s important to consider the additional benefits a lender might bring. For example, are they a full-service provider that could help consolidate and reduce credit card debt? Are they committed to lower fees? Are they quick-responding local providers with a stake in your Michigan community? Will they spend the time with you to ensure that you get into the right loan for your goals? All of these factors, including rate, are an important part of choosing a lending partner that’s best for you.
Myth 6: “The interest rate and the annual percentage rate (APR) are the same thing.”
Fact is, they’re different. The interest rate determines how much you’ll pay monthly based on a percentage of the loan amount. The APR is the rate that includes additional fees that are in the loan. The APR is a helpful tool to compare overall costs charged by different lenders. If you’re shopping for a mortgage, comparing APRs is a step worth taking.
Myth 7: “You can afford the loan amount you’re pre-approved for.”
Not always. It’s important to consider your monthly expenses and savings goals and then calculate how much you can comfortably afford to pay. This number may be less than what’s written on your pre-approval letter however it’s what works best for your overall financial goals. You should never feel pressured by a lender or real estate agent to spend beyond your comfort zone.
Myth 8: “The mortgage process is difficult.”
It doesn’t have to be! The first step is to choose a mortgage lending partner ready to work in your best interest. Be sure to get a true pre-approval so you can act fast when you find “the one.” Check both rates and fees. Determine if your lender is a for-profit broker or banker or a not-for-profit, full-service lender. Ask how your loan will be serviced. Finding the right lending partner is worth the effort. For more information, including handy homebuying checklists and calculators, visit msgcu.org/mortgage
Members of the editorial and news staff of The Detroit News were not involved in the creation of this content.