#1 – You need perfect credit to get a mortgage.
A mortgage loan is actually some of the easiest financing to get when it’s secured by your primary residence. Lenders know that you’re likely to pay your housing payment before you pay any other bill. And if you don’t, they have something of value to take from you. The same can’t be said for a credit card, for instance. If you decide not to pay your credit card bill, the creditor isn’t going to repossess the fancy dinner and shoes you bought with your credit card.
So you can actually have surprisingly crummy credit and still qualify for a mortgage loan. A conventional loan typically requires a 620 credit score and FHA loans usually require a 580 score (although lower scores may be acceptable in certain circumstances).
Lenders are particularly wary of issues like foreclosure, bankruptcy, judgement, and short sale. Waiting periods are required after major derogatory credit events. The waiting period depends on the event and the type of mortgage for which you’re applying. You should check with your favorite local loan officer to see if a waiting period applies to you.
Lenders are also most concerned with the most recent two years of credit history. If you’ve had collections or late payments in the past, but have mostly paid bills on time for the previous two years, you may be in the clear.
#2 – You need a big down payment to get a mortgage.
There are plenty of options for no/low down payment mortgages. VA and USDA loans don’t require a down payment at all. FHA loans require 3.5% down. And a standard vanilla Fannie Mae or Freddie Mac loan only requires 5% down. “Specialty” Fannie/Freddie products allow a 3% down payment.
Don’t have a minimal down payment? Down payment assistance programs might be your best bet.
And all mortgage products allow gifts from a family member as down payment.
#3 – There are special mortgage programs for first time buyers.
There really aren’t any special programs or tax benefits for first time buyers. There are many programs that are attractive to buyers because they have low down payments. There are also a few programs that restrict ownership in other properties. But very few mortgages require a borrower to be a first time buyer.
And the definition of a “first time buyer” is someone who has not owned a home in the previous three years.
#4 – The down payment is the only up-front cost.
In addition to your down payment, you’ll also have closing costs. Closing costs may range from $5,000 to $10,000 depending on the price of the home and property taxes (which are factored into closing costs).
Don’t have a down payment plus closing costs? You may be able to utilize a down payment assistance program to assist with closing costs.
Or you could negotiate for the seller to pay some or all of your costs. A seller can’t help with your down payment. But they can help with closing costs. But be prepared to pay an equivalently larger price for the home. Most sellers are concerned only with the bottom line (how much they’re making on the sale). They don’t care if they sell the house for $300K and don’t pay closing costs or $305K and pay $5,000 in closing costs.
#5 – A pre-approval guarantees you’ll get a home loan.
A pre-approval is only as good as the loan officer who issued it. Make sure your lender pulled credit and reviewed paystubs, tax returns, and bank statements. Even then, mortgages are complicated things. If your LO made a mistake when calculating your income or forgot to ask if you pay child support, that could affect your approval once you find a home. Make sure you’re working with a loan officer who is experienced and has local references.
There are a lot of loan officers who simply have no idea what they're doing. As a home loan processor, I often saw loan officers with 20 years in the industry who didn't know how to correctly calculate self-employed income using a borrower's tax returns. I had loan officers who took a loan application, collected a random assortment of paperwork, and turned the file into processing, crossing their fingers that the loan would be approved.
Mortgage lending guidelines are extremely complex. Please choose a loan officer who is knowledgeable and has a proven track record of success.
#6 – All mortgage lenders and brokers are the same.
See above. All mortgage lenders and brokers are not the same. “Call center” lenders (i.e., most Internet lenders) operate in a high production environment. Each loan officer may take 40 loan applications every month and close the 25 easiest. They don’t care whether your loan is one of the 25 or not.
You’ll get more help with the process by using a local lender. As a local lender, I have a vested interest in providing the best possible experience for my customers. Why? Because I want to continue to work with your REALTOR® in the future. And I know you'll be recommending my services (or not!!) to your friends and family in this community! An out-of-state lender doesn't have that motivation. He may never see you or your real estate agent again.
#7 – If you’re denied for a mortgage, you’re out of luck.
While Fannie Mae and FHA produce standard mortgage guidelines, lenders can have something called “overlays.” Credit overlays are guidelines that are more strict than those imposed by the GSEs. While FHA allows a 580 credit score, Big Megabank may require a 660 score their FHA loans. Fannie Mae may allow 100% of the down payment to be a gift. But Local Credit Union might require a portion of the down payment from a borrower’s own funds.
If you’ve been declined for a mortgage loan because you have a 450 credit score and a 75% debt ratio, it’s likely that you’ll have to wait a while to improve your credit and pay off some debt (or increase your income).
But if you’ve been told “no” because of a seemingly trivial matter, get a second opinion.
#8 – You should wait for prices to get better/interest rates to get lower/save for a down payment.
If I had a nickel for every time a customer wanted to wait for “better market conditions” to buy a home, I’d be a very wealthy woman. The usual outcome? Buyers get priced right out of the market.
Think you’re better off waiting a year to save an extra $6,000 for a down payment? What if the houses in your area increase in price by 5% in the same year? You’ll actually afford less home one year from now, even with your additional down payment, than you would today.
Waiting for interest rates to get better? That’s legitimate. And maybe they will. But if home prices increase by 5%, a 0.25% reduction in interest rate isn’t going to help you own more home.
Waiting for prices to get better? Keep waiting, my friend. The better option is to buy what you can afford today – even if it’s not your dream home, let that home increase in value, then trade up to a “better” property 3-5 years down the road.
#9 –The interest rate quoted is the interest rate you’ll get.
Lenders can quote you any interest rate they want. The truth is, until you find a home, negotiate a contract, and know your anticipated closing date, your rate isn’t locked in. It’s just an estimate.
And who cares what the estimated interest rate is on the day you happen to call your lender? Or on the day you happen to sign a sales contract? A great loan officer is always watching the market to lock your rate on the day when rates are lowest.
#10 – The lowest interest rate is always best.
Beware the “lowest” rate. Banks and mortgage companies don’t have just one rate they can offer. We have a range of interest rates available at different prices. The lower the interest rate, the greater the cost. Many lenders (particularly lenders that operate exclusively online) deliberately advertise uber low rates to lure you in, hoping you won't notice (or care about) the cost associated with that rate. Dig deep, be sure to ask about costs as well as interest rates, and remember, "if it sounds too good to be true, it probably is."