By Dean McCarthy
As a mortgage broker, I find that people who are in debt, and those who are looking to purchase a home after being in debt, often have misconceptions and myths about how mortgages work, and these can cost a lot of money and aggravation to those looking to purchase a home. Don’t let these myths deter you from getting your dream home, and having the knowledge of how they work will put you in a much better position to get it.
Myth #1: Prequalification means you have a guaranteed loan
It’s always advised to get prequalified before looking for a home. This helps you and your realtor know the ballpark figure you’re working with for a home to purchase. The prequalification process, of course, requires your income and credit to be evaluated. However, lenders don’t dive deep into all assets and debts. So no financial lender can guarantee you this loan amount.
What I find confuses people is that prequalification and preapproval aren’t the same thing, although many people think they are. If you get a preapproval, your lender goes through all your finances with a fine-toothed comb. This amount is just as good as guaranteed. However, your credit and finances could be reevaluated at any point before they close on your mortgage, so you do have to continue to keep your credit and finances in good order.
Myth #2: You need to have 20% down before you can purchase a home
To be honest, you want to have a decent sized down payment available when you purchase a home. The myth that you need to put down 20% before you can purchase a home was for the purchaser’s benefit. That’s because for many loans, putting down anything less than 20% would increase your interest rate and require a Private Mortgage Insurance (PMI) to be automatically added to your mortgage loan, costing you thousands to tens of thousands more over the life of the loan. However, now with more people qualified for the Federal Housing Administration (FHA) loan, you can qualify for a mortgage loan with just 3.5% down. While I believe you should still shoot for that 20%, it’s important to know there are other options if you come across your dream house before you have that 20% saved up.
Myth #3: The FHA is the mortgage lender
Another misconception I come across is that the Federal Housing Administration is an actual mortgage lender. This is not true. They are a government agency under the U.S. Department of Housing and Urban Development. What they do is offer mortgage insurance stating they will back up a loan that a financial institution makes. So any losses such as a foreclosure or short sale of a property funded by an FHA loan would be reimbursed by the FHA to the lender.
Myth #4: You need a high credit score to be eligible for FHA loans
Here, again, I think everyone should get their credit score as high as possible when considering a purchase of a home. While most mortgage loans do require good credit, this isn’t true in regard to FHA loans. Credit scores are not a factor when it comes to being approved for an FHA loan. These loans initially started as a way for those with no or low credit and low income to be approved for loans to live the dream of home ownership. Lenders must go through the applicant’s entire credit history on file and not just pay attention to a few late payments. These loans are even available for those with prior short sales, foreclosures, or a bankruptcy. Let me be clear, not everyone with poor credit will be approved, but if you have been taking steps to improve your credit, your chances are greater for approval than with a conventional mortgage loan.
As a broker, having the correct information is important to making a good decision which fits your circumstances. You want to be in the best financial and credit position possible when applying for a home loan, but you also don’t want to lose out on a great opportunity because you think something can’t be done when it can.