Getting a mortgage can be an intimidating process, filled with all kinds of myths and misconceptions. As you prepare to buy a home, you must have the right information to make the wisest financial decisions. Consulting a qualified mortgage lender in Charlotte, NC, is always the best approach to take.
In the meantime, this article will debunk some common mortgage myths to help you understand the facts. Read on to learn more.
Myth 1: You Need a Perfect Credit Score
One big myth is that you need a perfect credit score to qualify for any kind of mortgage. The reality is most conventional loans require a minimum score of 620. Many government loan programs have much lower requirements. While higher scores often mean better mortgage rates, you can still likely qualify even if your credit isn’t perfect.
The important thing is showing consistent credit activity with on-time payments. Issues like late payments or collections accounts can impact your chances, but having some credit blemishes won’t necessarily make a mortgage impossible. Speak to a mortgage lender to understand requirements and steps to improve your financial profile.
Plus, your down payment could also play a role in your qualification. Lenders may be more willing to work with a lower credit score if you can make a larger down payment. Of course, you can always improve your credit score before applying for a mortgage to get the best possible rates and terms.
Myth 2: You Must Have a 20% Down Payment
Another common mortgage myth is that you must put at least 20% down to buy a home. It is a tale as old as time, but you can often buy a home with much less down. Many loan programs allow for low or even no down payment options.
Conventional loans require as low as 3% down for first-time buyers. With FHA loans, you can put down as little as 3.5%. VA and USDA loans allow 0% down for qualifying borrowers.
The upside of 20% down is avoiding paying private mortgage insurance (PMI), which costs 0.2-1.5% of the total loan amount annually. Private mortgage insurance drops off once your loan is paid down to have 22% equity in the home, so it doesn’t last forever. For many buyers, putting less down makes sense to get into a home sooner with manageable monthly payments.
Myth 3: Fixed-Rate Mortgages Are Always the Best Choice
The 30-year fixed-rate mortgage has become somewhat of a staple in the real estate industry. Many homebuyers believe these loans are inherently better products. The truth is it depends on your unique situation and financial plans. Of course, there are benefits to choosing it. Namely, your interest rate remains the same throughout the life of the loan, allowing for predictable monthly payments.
Although adjustable-rate mortgages come with the risk of higher long-term rates, they typically offer lower introductory rates, which is suitable for buyers who plan to move again soon. The initial interest rate (sometimes referred to as the “teaser” rate) may be lower than a fixed-rate mortgage, which could result in lower monthly payments for a set period.
You’ll need to weigh your timeline, budget, and interest rate forecast to decide which type works best rather than assume one is the obvious choice. Get rate quotes for both to compare initial costs.
Myth 4: You Can’t Get a Mortgage If You’re Self-Employed or Have Irregular Income
Many self-employed borrowers, those with irregular incomes, or those who participate in the gig economy shy away from exploring mortgages, presuming lenders can’t qualify them. They end up borrowing with less favorable financing options (or not at all). Mortgage lenders are willing to work with self-employed individuals as long as they can show proof of income. In some cases, showing proof of income even comes in alternative forms such as providing bank statements showing business deposits.
Most mortgage lenders in Charlotte, NC, have loan options to accommodate fluctuating income as long as you can verify and document your earnings. That documentation might include tax returns, 1099 forms, bank statements showing past deposits, or profit and loss statements. Expect to provide more documentation than salaried employees, but know that being self-employed or having variable earnings doesn’t prohibit mortgage approval.
This information usually goes back two years to provide a more accurate earnings picture. If you can show increasing, rather than decreasing, income over the last two tax returns, it works in your favor. However, even if your earnings declined over the last two years, there are some programs that look back at only one year of earnings. Additionally, mortgage lenders will also consider other factors, such as credit score and debt-to-income ratio, when determining mortgage eligibility.
Myth 5: Refinancing Is Always Beneficial
A broad assumption is that refinancing your mortgage always makes good financial sense. In reality, that’s not necessarily the case. Yes, refinancing can mean lowering your interest rate or monthly payments, but it also could involve starting your 30-year loan term over and paying closing costs again. Also, depending on the current rates available, refinancing could mean paying a higher interest rate than what you had.
First, why would you refinance? If the answer is paying off high-interest revolving debt, extending your loan term, or paying for college, performing a side-by-side financial analysis of interest expenses and monthly cash flow will help you make a solid financial decision. To determine if refinancing merits the upfront costs and effort, look at your break-even timeline — how long would it take to recoup closing fees based on the monthly savings from your new loan? If it takes more than a few years to break even, a refi may not be the most brilliant move, especially if you’d sell soon anyway. Reputable mortgage lenders have software to analyze these situations that will reveal whether it makes good financial sense to move forward or not.
Myth 6: Paying Off a Mortgage Early Is Always the Best Option
At first glance, paying off your mortgage early is a no-brainer. No debt, no interest payments, and peace of mind. It’s easy to think you should funnel all extra funds toward paying off your mortgage early. Yet, that’s not universally the wisest money move.
Investing extra cash or putting it toward other financial goals could make more sense, depending on mortgage rates and your financial situation. For example, if you have other high-interest debt or haven’t saved for retirement, paying off your mortgage early could come back to bite you. Likewise, a safety net (college funds, emergency funds) should take precedence over an early mortgage payoff.
Crunching numbers is critical here. Compare potential investment returns to interest paid on a mortgage to see which option looks more advantageous. Factor in other goals like retirement contributions or college savings as well when deciding what to do with surplus money instead of defaulting to prepaying a mortgage.
Do Your Homework
Hopefully, this article has shed light on some pervasive mortgage myths that confuse and intimidate prospective homebuyers. As you can see, qualifying for financing is certainly achievable even if you don’t have perfect credit, a substantial down payment, or a W-2 job.
While mortgage approval rules aren’t as rigid as commonly thought, the key is doing your homework. Ensure you understand all the various loan types and programs available before assuming you won’t qualify.
Perhaps most importantly, work with Charlotte, NC, mortgage lenders like TruLoan Mortgage. We prioritize educating borrowers rather than just making a quick sale. Our team can provide you with tailored guidance and advice so you can obtain affordable financing that genuinely fits your needs.
Don’t let myths create mental barricades that stop you from exploring homeownership. Reach out for a consultation today to start the mortgage process off on the right foot.