Have you dismissed the thought of becoming a homeowner due to the financial barriers? You may be short-changing yourself. Many of the details aspiring homeowners believe about buying a home are myths and I am going to dispel some of the more popular folklores.
Myth #1: I need a 20% down payment
Saving 20% of the price of a home in many places isn't just a challenge; it's a blockade. And it's not a must-do. In fact, the median down payment for first-time buyers is 7%. How can you become part of the less-than-20 club?
FHA Loans: The Federal Housing Association (FHA) is an old friend to first-time buyers and others who are ready to become homeowners with less than a 20% down payment. If you qualify, you may be able to get a loan with as little as 3.5% down.
California Housing Finance Agency (CalHFA) and California Department of Housing and Community Development (hcd.ca.gov): These are some of the state agencies that sponsor down-payment assistance programs that help prospective home buyers in different ways. These are just two resources that may be helpful, there are more.
VA: Yes, the U.S. Department of Veterans Affairs (VA) mortgage guarantee program is specially designed to assist qualified veterans to buy a home with zero down payment.
Gift Funds: Sixteen percent of buyers ask friends or relatives to help jump-start their home ownership with a gift. Talk to your lender first, though. There may be limits to the amount of gifted funds they'll accept, and they may require your benefactor to sign some paperwork.
Myth #2: My Low Credit Score Means I Can't Buy a Home
So, your credit could use a tune-up. That doesn't mean you have to forego your home-buying dreams. Here are some options for those with a less-than-stellar credit score.
FHA loan: With a credit score of 500, you can apply for an FHA loan, but you'll need a 10% down payment to offset the risk. If your score is a tick better (580), you can participate in their down-payment assistance program, requiring only 3.5%.
A higher down payment: On the off chance you have enough cash on hand to put down more than 20%, the higher down payment can help those with lower credit scores be less risky for lenders.
A co-signer: Find someone with better credit to co-sign the loan – but understand that if you don't make the payments, the cosigner will be financially responsible (and their credit will also suffer).
Check your credit report: Maybe your credit isn't as broken as you think! Order a copy of your report from all three reporting agencies (Equifax, TransUnion, and Experian). You can order a free report from each of the bureaus once a year at annualcreditreport.com.
Correct and Repair: If you find inaccurate or old information, ask the agencies to correct it. Also, good mortgage brokers often will aid with credit repairs and corrections.
Myth #3: I Can't Afford the Agent's Commission
Here's one you can immediately remove from your list. Typically, the commission for both the seller’s and the buyer’s agent are paid by the seller from the proceeds of the sale.
This is one of many reasons to contract with and work with a good buyer's agent. The seller's agent doesn't work for you, and it’s imperative that you have a professional representing your interests.
Myth #4: My Bank Will Give Me the Best Mortgage
There are a lot of positive things to say about working with your local bank, but assuming they'll give you the best mortgage is a mistake. Banks are only one type of home-loan lender. Others include credit unions and mortgage companies.
Or, if you prefer to let the lenders come to you, consider getting a loan through a mortgage broker. Brokers have access to many lenders, and they'll shop their marketplace based on your circumstances, providing you a broader selection of loan options.
The bottom-line, mortgage rates and terms can vary dramatically. So, talk with your local banker, a credit union, and perhaps a mortgage broker to ensure you are getting the best rate and terms possible.
Myth #5: I Was Pre-Approved. I Got the Loan!
Well . . . not quite. DO NOT order that shiny red convertible or pack away your tax documents just yet.
You don't get the loan until:
The seller accepts your offer
You complete your inspections and release all your contingencies
Your lender approves the loan
You sign the loan papers
Between (a) and (d), the lender will have the home appraised to ensure its value is in line with the purchase price, check your credit again, and ask you for more documents than you ever knew existed.
So, what does "pre-approved" mean for a loan? It tells sellers you're eligible for a loan and shows them you're a serious, qualified buyer. This gives them some confidence that you will be able to fulfill the loan requirement in your purchase contract.
Myth #6: The Interest Rate Is What Matters Most
A low interest rate is important, but it's not the only thing to consider. When shopping around for a loan, check the annual percentage rate (APR). It includes all loan costs, such as origination and processing fees that can vary widely from lender to lender, in addition to the interest rate.
One loan may have a lower interest rate, but the up-front fees cost more than you'd save in interest. The APR lets you compare apples to apples.
Before you sign the loan, your lender will give you a loan estimate, a line-by-line estimate of fees. You'll find the APR there. Use that rate to compare the loans you're considering.
Now get busy! You may be closer to home ownership than you thought. Happy house hunting!