Taking out a mortgage is a substantial financial commitment and is most likely the single largest investment people will make during a lifetime. While exciting, home-buying can be overwhelming. It’s a complex process involving numerous steps beyond finding the right property. Purchasing a home is just as much an emotional investment as a financial one. It’s a place to establish roots, make memories, and build generational wealth.
Misinformation about the home-buying process exists, leading to a handful of several myths that might prevent someone from taking out a mortgage. Below we debunk several of the commonly held misperceptions.
Myth #1: A buyer must have a perfect credit score to purchase a home.
While credit scores are factored into taking out a mortgage, buyers don’t need perfect credit. A middle score of 740 or above will certainly get them the best interest rate; however, an individual can still qualify for a loan even if their score is as low as 620. The Federal Housing Administration (FHA) will consider someone for a loan if their middle score is at least 580.
In addition to credit score, lenders will look at income, debt-to-income ratio, and credit history when someone applies for a mortgage. So even if a potential buyer makes enough money, that alone will not qualify them for a mortgage.
Myth #2: Today’s interest rates are too high to purchase a home right now.
Many of today’s current first-time buyers only have knowledge of the abnormally low rates from the past few years and may consider today’s interest rates of 6% or 7% too high. While these rates are high compared to previous years, the industry has seen interest rates much higher. In many ways, taking out a 30-year mortgage with a 7% interest rate is more economical than renting, where the interest rate is 100%, and you do not build any equity.
Myth #3: Self-employed people cannot qualify for a loan.
As a result of the pandemic, many people left their corporate positions and opted to launch their own businesses. Those individuals may be under the notion that they would not qualify for a loan because their income is less steady than someone who holds a salaried position. While it may be more challenging for a self-employed individual to take out a mortgage, they can still receive approval. However, it is essential to remember that mortgages are based on net income, not gross.
Myth #4: Someone’s employment history is the only thing that counts when applying for a mortgage.
Employment history and ability to hold down a job are essential factors when lenders qualify someone for a mortgage. What potential buyers may not realize is that education also counts.
If a recent college graduate wants to purchase a home, their college degree – as long as it is applicable to their job, that education is counted toward their work history. On the same token, if someone switches careers from hospitality to nursing, going to nursing school for two years will be considered when they apply for a mortgage as long as a degree is obtained.
Myth #5: Closing costs only include the down payment.
Many people think they need to be prepared only to make a downpayment when they come to the closing table. While it is true that buyers need to be ready to put a percentage down (usually 3% to 5%), they also need to cover various other expenses, including lender and title fees, taxes, credit reporting fees, and appraisal fees.
Remember that everything other than the down payment and lender fees is subject to change during the loan process. (Most often, they decrease from the original loan estimate.) It’s always best to wait until the end of the loan process before requesting final figures, as it allows all parties (lenders, title companies, appraisers, etc.) the time to negotiate and provide correct information.
Myth #6: To receive 100% financing, I have to be a first-time home buyer.
First-time homebuyers might be unable to make a downpayment, so they will apply for 100% financing.
Buyers must be prepared to meet specific qualifications to apply for these loans. Credit scores, the location of the property, and who will live in the home are factored into the equation.
Many people do not realize that no-downpayment loans are not just for the first-time buyer. Repeat buyers can utilize them, too.
It is a good idea to do some comparison shopping to determine the best loan. Buyers should keep in mind that they don’t have to use the same lender for the life of a loan. They can explore refinancing options for better interest rates and loan terms.
Myth #7: It’s too time-consuming and confusing to calculate a monthly mortgage payment.
Potential buyers may think figuring out a monthly mortgage payment is complicated. In reality, it’s pretty straightforward. As a general rule, multiplying the sales price by 1% is a good indication of what your monthly mortgage payment may be.
Coming up with this figure before home shopping is always a good idea.
Myth #8: Texas’ homestead laws do nothing for the buyer.
On the contrary, Texas homestead laws are incredibly favorable to Texas homeowners. Our laws are some of the strictest in the country, which helped Texans hold onto their homes during the 2008 housing crisis and the COVID pandemic.
Here are some other ways the state’s homestead laws protect Texans.
- Per Texas Homestead law, a married individual cannot buy a primary residence in Texas without their spouse being present at the closing. Also, when someone purchases a secondary or an investment property, a married individual’s spouse must verify as closing that these properties are not their primary residence.
- In addition to the Homestead Laws that protect the buyer, there are substantial property tax benefits that come with the Homestead Exemption.
Buying a home should be a rewarding and fulfilling experience and not one filled with unpleasant surprises and anxiety. Understanding the complexities and learning the facts will make a much smoother transaction and eliminate many of the unknowns.
Shomari Franks is the mortgage origination manager with Members Choice Credit Union, a full-service financial institution based in Houston. For more information about the credit unions’ mortgage services and products, visit www.mccu.com/mortgage.
