Invest Smarter by Understanding the Top 6 Most Common Mortgage Myths

Common Mortgage MythsInvesting in real estate properties involves a significant amount of knowledge and decisions that must meet your financial goals for the near and distant future. Being able to tell the difference between what is real and what is a myth will not only help you invest smarter, but also better understand the industry and give you the chance of making a larger profit. Being misinformed about something that you plan on investing in is worse than gambling with your money. When it comes to mortgages, even a small mistake can cost you tens of thousands of dollars, so having the proper knowledge is more important than ever (Read: Mortgage Counseling Services You Need).

The mortgage industry is not the only one that is plagued by myths. Myths have a way of propagating themselves very quickly and not going away that quickly. The only way of finding out the truth, is through a little research or by seeking the help of a professional mortgage counselor. Misleading advertising tactics are part responsible for the spreading of these myths. Many borrowers truly believe lender advertisements which promise the best interest rates to absolutely everyone, or charge the same fees and closing costs.

Understanding the most common mortgage myths can help you prepare better, have a quicker and painless experience, and eventually reap the rewards of your investment. Taking out a mortgage loan can be a difficult process if you don’t have a good understanding of how things work, from the moment that you apply for a mortgage, to the moment that you pay the closing costs and start making your monthly mortgage payments. Throw a few myths in the mix, and you can become discouraged and change your mind, or become overly confident and make mistakes that will cost you, on the spot or in the near future.

The Top 6 Most Common Mortgage Myths

This is a top list of common mortgage myths, myths that can be quickly debunked by researching the basics of taking out a mortgage. Unfortunately, many borrowers and beginner investors are in a situation where they need to act quickly, or are simply careless, and end up spending more than they planned, lose opportunities, or have financial trouble later on (Read: Watch Out! Protect Yourself From Homeowner Scams). Here are the top 6 most common mortgage myths and what you need to know about them.

Myth #1 – Pre-qualification and pre-approval are the same thing

Based on your declared income and debt, pre-qualification allows you to find out how much money you can borrow. Pre-qualification makes it easier to find a home because you are aware of what your price range is. However, being pre-qualified doesn’t necessarily mean that you will be approved for the mortgage loan. Pre-qualification is based on what you declare you make and owe, so your lender will need documentation that backs up your claims. Being pre-approved when the time comes to make an offer on a home carries a lot more weight than being pre-qualified, because it means that your lender has already seen the necessary documents regarding your income, debt and credit, and they are willing to give you the loan without much more verification. A pre-approval document will make you look more serious in the eyes of a seller, and might give you the upper hand over someone who is only pre-qualified. To learn more about this click here.

Myth #2 – You need to make a 20 percent down payment

Putting down 20 percent may have been the only way to buy a home in the past, and the most common way in the present, but there are other options out there. The 20 percent will ensure that you won’t be required to pay for Private Mortgage Insurance, but that doesn’t mean you cannot put down less than that. Some borrowers may even qualify for a mortgage loan insured by the Federal Housing Administration (FHA), which will allow them to make a lower down payment, as little as 3.5 percent. Also, loans offered to current and past military personnel offered by the Department of Veterans Affairs (VA) do not require a down payment. There are other options out there, but most have stricter qualification requirements, so just keep in mind that you can make a lower than 20 percent down payment on a traditional mortgage, as long as you agree to pay a Private Mortgage Insurance for a period of time.

Myth #3 – A higher income means a larger mortgage loan

The truth is that your income has an influence over how much money you will be able to take out on a mortgage loan, but it is closely related to how much debt you have. Lenders will take a close look at your debt to income ratio, so having a large income means nothing if you also have large debt, making your debt-to-income ratio unfavorable. Lenders usually prefer that a borrower spend no more than 28 percent of his or her gross income on housing expenses, and no more than 36 percent on his or her total debt. Borrowers who are self-employed will have a harder time getting a big mortgage even if their income is large, because lenders consider their income less stable than the income of a person with an employer.

Myth #4 – Adjustable-rate mortgages are less advantageous than fixed-rate ones

It is true that you risk paying more on an adjustable-rate mortgage because the interest might increase after a while, but the interest might also decrease, making an adjustable-rate cheaper than a fixed-rate mortgage. Also, you might plan on not living in a home for a long while, which makes adjustable-rate mortgages better than fixed-rate ones. Adjustable-rate mortgages have a fixed-rate period in the beginning. The fixed-rate on an adjustable-rate mortgage will most likely be lower than the interest on a 30-year fixed-rate mortgage, for example, making it ideal for those who move a lot (Read: Even With Fixed-Rate Mortgages So Low, Don’t Overlook Adjustable Rates!).

Myth #5 – Everyone receives the advertised interest rate

Most of the time, the interest rate advertised by the lender on TV, online and in newspapers is reserved for those borrowers who have a perfect credit score, a great debt-to-income ratio and put down a large down payment. The interest rate is influenced by all these factors, plus the term of your mortgage, the points purchased and locking in your rate. You could probably read all that in the fine print of the advertisement, but most people don’t and are surprised when they find out that they don’t meet the requirement for receiving the advertised interest rate.

Myth #6 – The lowest quote that you receive is always the best

Usually, when something sounds too good to be true, it probably is. Some lenders will quote you a great interest rate and great terms for your mortgage loan, making it look like the best one that you have found. Then, after you have already started to spend time and money, everything becomes more expensive. Sometimes lenders do this illegally, but most find ways to do it legally, usually by not giving you a quote in writing, or by hiding behind the fine print. A well-known lender will probably like to avoid the bad press that this will generate, but you should always ask for things in writing before choosing a lender. Click here to read more about this.

Mortgage myths can be found in every aspect of taking out a loan, and some might make you think that you are not ready to buy a home, while others will actually cause you to spend more than you originally planned. The only way to invest your money smarter is to document yourself in order to make sure that you are in full control of everything that is involved in buying a home.

Top Ten Mortgage Mistakes

hm-buying-mistakes-150x150Obtaining a mortgage loan is one of the most imperative steps in the home buying process. But procuring these loans aren’t as easy as it used to be. It is important to find industry professionals who can help make the loan process easy and efficient.

There are many protections and regulations in place to cover both the lender and the borrower. These rules keep you safe from unsavory lenders, and new underwriting rules guard lenders from defaults by borrowers.

When looking to buy a home, it is important to have a great credit score, a steady full-time job, liquid assets, very little debt, as well as an understanding of the mortgage market. Otherwise you risk paying significantly more for a mortgage loan. Without a mortgage, it is unlikely that you will have the opportunity to become a home owner, so it is important to make as little mistakes as possible during the beginning stages of mortgage loan process.

Mistakes to Avoid

  1. Rushing In. Learn about the mortgage market before plunging right into it. Though there aren’t as many loan options as there used to be, searching for your best fit can still be a huge ordeal if you are not smart about it. Trustworthy and helpful information on mortgages is available from a wide array of sources; you just have to search around for independent sites and they will tell you all about the various mortgage options with the pros and cons spelled out for each. Take a look at the tabs on our homepage for information on 15-year mortgages, 30-year mortgages, and adjustable rate mortgages.
  2. Waiting Too Long. If you just sit around and wait for interest rates to drop really low, then you might be sitting for a while. You can’t ever tell how low the market really is until looking back on it, so don’t delay. Once you are financially ready for the move and it’s the right time in your life to own a home, go for it.
  3. Not Checking Credit Beforehand. Don’t let the mortgage lender be the first one to check your credit scores or else you may never even get to the application. Mistakes and bad credit happen, and it is up to you to correct the errors that harm your credit. The best way to get your report for free is through the federal government approved site AnnualCreditReport.com. It’s worth it to spend a few more dollars and see your score.
  4.  Not Looking at Your Choices. These days there are many mortgage lending options, both online and offline. Banks, mortgage brokers, credit unions, mortgage lenders, seller financing, and local, state, and federal mortgage programs are all viable options, so carefully review them all. People like independent advisors, exclusive buyer agents, counselors certified from the U.S. Department of Housing and Urban Development, and other professionals who don’t make mortgages themselves are good resources to help you understand all your options.
  5. Not Thinking about Total Possible Cost. Your Annual Percentage Rate (APR) only includes actual interest and additional costs or prepaid finance charges you finance, so you most dig deeper when looking at loan fees and costs. Other costs can be commissions, closing costs, and other fees that might not be financed via the mortgage. Then there are the costs of owning and taking care of the house. This home ownership expense can include homeowners insurance, home ownership fees, annual property taxes, maintenance and repair, and having renovations done. 
  6. Not Taking Initiative. To be credible as a serious buyer, you need to get pre-qualified for a mortgage. Doing this will level the playing field between investors and bidders, give you negotiating strength with lenders, and help you realize price-shopping boundaries.
  7.  Failing to Lock Down a Rate. Even if you get pre-qualified for a mortgage, increasing rates could price you out and make these unattainable. The best thing to do is lock down your rate the second your application for a loan is approved. You can do this with tools like Mortgage Match.
  8.  Buying Beyond Your Means. Keep a budget and check it often. Knowing how much money you have and how much you are already allocating to other expenses is imperative in letting you know what you can afford to pay for a home. Remember these payments include the mortgage, insurance, property taxes, general maintenance, and monthly utilities. Even if the lender you choose is willing to give out more, it is important that you borrow only how much you can afford. Take a look at this article to help you decide “How Much Home Can I Afford?”
  9. Dishonesty. It is crucial that you tell the truth at every stage of the loan process. If lenders find out about any false information they can take away the loan and your credit will suffer heavily. And not just that, but making untrue statements on your application is considered mortgage fraud, which is punishable with a $1 million fine, 30 years in a federal prison, or both.
  10. Losing Courage. Buying a home can be a scary thought, but keeping an aggressive mindset will give you the resolution to talk to realtors and work it out. Know when to give and when to push, and use the above advice to help guide you safely and efficiently through the process.

Doing your research and being as prepared as possible will be your best asset in your quest to secure a mortgage loan. This may be a long process, so put your game face on and get ready, because being a homeowner will be worth it!