Misconceptions about mortgages may have homebuyers fearful or overjoyed, but five debunked myths may move them more toward the middle of the spectrum, according to a recent U.S. News & World Report article.
The article cites research conducted by Wells Fargo & Co., the largest mortgage lender in the U.S., which was published in September. Wells Fargo surveyed more than 2,000 adults and found that many borrowers who can afford a home may be frightened off, believing that buying a house is something they simply can’t do.
Among prospective homebuyers’ concerns are credit scores, down payments, the investment mentality, ownership and the American dream. Mortgage professionals and experts weighed in to address their sentiments.
1. A Low Credit Score is a Deal-Breaker
Two-thirds of Wells Fargo survey respondents believed a homebuyer must have a very good credit score to buy a house. But, the article notes, it isn’t a deal-breaker if the score is middling.
“While credit is scrutinized, some loan types will allow credit scores as low as 620,” Gaye Rowland, senior vice president of SharePlus Bank, tells U.S. News. “Other compensating factors such as larger down payments or low debt-to-income ratios can offset some negative credit information. Every situation is analyzed individually.”
2. The 20% Down Payment Rule
More than 40% of Wells Fargo respondents believed the only way to buy a house was to give a lender at least 20% of the purchase price of the house. But this, too, is a myth.
While it helps to have a 20% down payment, particularly if you want to avoid paying monthly private mortgage insurance, many banks and mortgage companies offer loans that don’t require a down payment anywhere close to 20%.
“We offer many programs that either have 100% financing or a 3.5% down payment,” Alyssa Schwabe, spokeswoman for GSF Mortgage, tells U.S. News.
3. A House is a Good Investment
Nothing in real estate is guaranteed, so homebuyers need to think of their houses as just that — not a financial tool designed to pad their investments or retirement.
“People tend to purchase their homes with a little bit too much of an investment mentality,” Michael Goodman, a certified public accountant and financial planner at Wealthstream Advisors in New York City, tells U.S. News. “I’m not saying it isn’t part of your overall net worth, but the home purchase really should be for somewhere you’re going to live.”
4. Owning a Home Starts With Getting the Keys
While that’s what many homeowners think, at the outset, if they don’t put much down and have no equity, the bank really owns the house. Consider how much interest is paid at the beginning, experts say.
“If one has a $100,000, 30-year fixed-rate mortgage at 5 percent, the unpaid balance paid down will be less than $9,000 after five years – and less than $20,000 after 10 years,” Eddie Seiler, director of mortgage finance at Summit Consulting and a former director at Fannie Mae, tells U.S. News.
5. The American Dream Can Also Be a Nightmare
Owning a home, for many, is the ultimate goal in life, but getting this kind of tunnel vision can lead to regrets.
“Many people believe that owning a home is the American dream. For many, it’s also their nightmare,” Seiler says. “For example, when the economy tanks in a specific geography – think Detroit – it’s hard to sell and move to an area with jobs.”
To read the full U.S. News & World Report article, click here.
Written by Emily Study