The path to homeownership can feel like a minefield of misinformation, making it difficult for potential home buyers to distinguish fact from fiction. Misconceptions fueled by hearsay or outdated but well-meaning advice can lead to costly mistakes or missed opportunities.
Read on as we debunk five of the most common mortgage myths that could prevent you from owning the home of your dreams.
Myth 1: You Have to Put Down 20% to Avoid PMI
A significant obstacle for many home buyers is the commonly held belief that a 20% down payment is required to secure a mortgage and avoid private mortgage insurance (PMI). While this was true in the past, lending practices have evolved significantly.
At Radiant Credit Union, for instance, we offer options for borrowers to pay as little as 10% down and still avoid PMI. This lower threshold removes a significant hurdle for many homebuyers and puts homeownership within closer reach.
It's worth noting that the median home value in the United States has increased by 3.3% over the past year, according to Zillow. A 10% down payment allows more people to tap into this appreciating market faster, start building equity, and realize the dream of homeownership sooner.
Myth 2: You Have to Finance Your Forever Home Right Now
Another prevalent mortgage myth suggests that a potential homeowner should finance their “forever home” from the get-go. But be careful not to be persuaded—by a realtor or anyone else—to buy a home that is outside of your budget, no matter how nice it may be.
Your financial well-being depends on your ability to make your monthly mortgage payments on time, so don’t overextend yourself. And in reality, your first home is often a stepping stone toward your dream home.
Consider this: a starter home can serve as a tool for building equity. According to the National Association of Realtors:
“At the national level, a homeowner who purchased a single-family existing home 10 years ago would have gained $225,000 in home equity if the home were sold at the median sales price of $363,100 in 2021 Q3.”
So, even if your first home isn't your “forever home,” living in it for a few years can potentially increase your equity and offer the financial leverage you need for your next property.
Further, as the St. Louis Federal Reserve's data shows, homeowners' equity is on a general upward trend. Starting with a smaller, more affordable property can be a sound investment and a viable step down the path to your dream home.
Myth 3: It's Always Better to Finance With Your Realtor's Broker of Choice
A realtor may recommend a particular broker with whom they frequently work, leading many homebuyers to believe this is their best or only option. However, you should always shop around for the best rates and services.
Comparing rates from different lenders could save you thousands of dollars over the life of your loan. According to Freddie Mac, borrowers can save $1,500 on average over the life of their loan by getting at least one additional rate quote and an average of $3,000 by getting five quotes.
Furthermore, credit unions like Radiant often offer competitive rates and personalized service. We work closely with our members to ensure they understand each step of the mortgage process. This transparency can help you feel more confident and less stressed about the process.
Myth 4: A Poor Credit Score Bars You From Homeownership
One of the most discouraging myths for potential homeowners is the belief that a poor credit score makes getting a mortgage impossible. While it's true that credit scores can impact your eligibility for certain mortgage products and the interest rates offered to you, a lower score doesn't categorically bar you from homeownership.
Various mortgage programs cater to those with less-than-stellar credit. For instance, the Federal Housing Administration (FHA) offers loans designed for low to moderate-income borrowers, by requiring lower minimum credit scores and down payments than many conventional loans.
At Radiant Credit Union, we offer personalized guidance to help our members explore various financing options that best suit their financial situation. We understand that everyone's situation is unique, and there are different paths to homeownership for everyone.
Myth 5: Pre-approval and Pre-qualification Are the Same Things
Many potential homeowners confuse the terms “pre-approval” and “pre-qualification,” believing they're interchangeable. These two terms must be understood to avoid disappointment and confusion in the buying process, as they represent distinct stages in the home-buying journey.
A pre-qualification is an initial assessment by a lender based on the information you provide about your income, debt, and assets. It gives an estimate of how much you can borrow. This process usually doesn't involve a credit check and needs to be more thorough and binding than a pre-approval.
On the other hand, pre-approval involves the lender thoroughly checking your credit and financial background to determine precisely how much they'd be willing to lend you. Pre-approval sends a powerful message to sellers by demonstrating that you're a serious and eligible buyer.
Take the First Steps to Secure Your Mortgage Today!
Don't let the above five mortgage myths hold you back from your homeownership dreams. Questioning these myths, seeking reliable advice, and making informed decisions based on your financial situation will help you reach your homeownership goal faster.
Informed decisions are the cornerstone of a successful home-buying journey. At Radiant Credit Union, our experienced mortgage advisors will take the time to understand your circumstances, provide personalized advice, and guide you toward the right solutions for your unique needs.