Myth vs Fact: Mortgage Edition

The decision to purchase a home is a major one, and if you’re thinking about buying, it’s important to take your time and do your research. While finding the right home is important and probably the most enjoyable part of the process, it’s a good idea to start by reviewing your mortgage options. There are many myths and misconceptions about the mortgage process, which can be discouraging. We would like to ease your mind by debunking a few of the more common myths and help you make well-informed decisions throughout your mortgage journey.

Your first step in homebuying should be to meet with a mortgage lender. A mortgage lender can help you set a timeline and realistic expectations for the process. During this initial meeting, they can go over requirements and determine different loan options. They can also assist you with a mortgage application if you decide you’re ready to take that step. This meeting may also yield a preapproval letter, which can be helpful when you start looking for homes. The terms preapproval and prequalification bring us to the first myth.

Myth #1: Prequalification and preapproval are the same thing.

Fact: The terms prequalification and preapproval are not interchangeable. The prequalification and preapproval differ in the level of verification that the mortgage lender completes.

A prequalification consists of self-reported, basic information. This generally gives you and the lender a rough estimate of how much you may be eligible to borrow based on the financial information you provided.

A preapproval is an in-depth look at your financial history, including your credit report, bank statements, and income verification. A preapproval letter provided by your mortgage lender generally carries more weight and helps make your offer on a home more attractive to sellers.

Myth #2: A preapproval guarantees you will get a home loan.
Fact: Unfortunately, you can be preapproved for a mortgage but still be denied for the loan. There are many reasons a loan can fall through. Some of the more common reasons are that you have changed your career, credit, or financials since being preapproved. It could be as simple as opening a credit card account or as drastic as changing jobs. Prior to closing, your mortgage lender will re-verify everything from employment to credit history.

It is very important to avoid major changes during this time; however, if a change is necessary, you should inform your mortgage lender as soon as possible to ensure that it will not impact your preapproval status.

Myth #3: You need perfect credit to get a mortgage.
Fact: While your credit score is a significant factor in borrowing power, do not let a lower-than-perfect credit score deter you from your homeownership goals. While your credit score and credit history are factors in a loan decision, excellent credit is not always expected or required. There are several product options in today’s market that offer more flexibility on the not-so-perfect credit.

Myth #4: You need 20% down to purchase a home.
Fact: Different mortgage programs have different down payment requirements. While some programs may require 20% down, there are options available that do not. Some programs only require 3% down, 5% down, or even 100% financing (no down payment required). Keep in mind that when you choose a 100% financing option, there are still closing costs and inspection fees, among other costs that are associated with securing the mortgage and purchasing the home.

Myth #5: Adjustable Rate Mortgages (ARMs) aren’t a good option.
Fact: Many assume that ARMs are not a good option because of possible unexpected rate changes, but this is not always the case. Knowing and understanding the terms associated with any ARM product is key.

There are several ARM products in today’s market that have predetermined caps. Predetermined caps are set to limit how much an interest rate can adjust (up or down) in a single adjustment period, as well as over the life of the loan.

ARMs can be an excellent option for many borrowers wanting to take advantage of a lower rate and payment.

Myth #6: Paying off mortgages early isn’t allowed.
Fact: Although prepayment penalties are less common in today’s market, some lenders may still impose this type of fee when you pay off your mortgage early.

That same logic applies to making principal payments towards your mortgage. If your budget allows, this can really be beneficial. Making additional principal payments can lower the amount of interest you pay over the life of the loan, and it can also reduce the term.

It’s essential to ask your lender beforehand if there are any fees associated with paying off your mortgage early or making additional mortgage payments to the principal to reduce the term of your loan.

We hope that by addressing a few of these common mortgage myths, you will feel more comfortable talking with a mortgage lender. When you’re ready to start your mortgage journey, our team is here and happy to help.