Whether you’re in the market to buy your first home or you’ve been around the block a time or two, chances are you might still feel a little unsure about how to really nail the process. Nobody teaches you how to navigate what is likely one of the biggest purchases of your life, and this multi-step journey can bring up a lot of unknowns — especially when tons of misleading myths surround the topic.
We’re here to dispel the most popular myths to help your process go as smoothly as possible — and to make sure you get the best bang for your buck. So, no matter if you’re crazy about condos, musing over mansions, or raving about ranches, start your search by separating these home facts from fiction.
Myth #1: You have to put 20% down.
When it comes to down payments, 20% is certainly considered the magic number. But while it’s often recommended that you make a down payment that’s 20% of your home’s value, it is not a requirement. In fact, several mortgage programs accept lower down payments — even as low as 3%.
You don’t have to rule out of homeownership if you haven’t saved up as much as you would have liked. Just be prepared to possibly purchase private mortgage insurance (PMI) if your down payment is less than 20%. PMI protects your lender should you default on your loan and will likely add an upfront cost and additional monthly fee to your mortgage payment.
On the other hand, if you’re able to put down 20% or even more (and it makes sense for your financial situation), doing so might be a good idea. When you make a larger down payment, you could receive lower monthly payments in return — potentially saving you thousands of dollars in interest over the life of your loan.
Myth #2: Borrowed money can be used for your down payment.
Using personal loan funds or borrowing money from your grandparents, for example, is typically a no-no when making a down payment. Yes, even when it comes to flexible lenders. That’s because it makes you a riskier borrower since doing so will increase your debt-to-income (DTI) ratio, which lenders prefer to be 36% or lower, and no higher than 43%. Your DTI ratio represents how much of your gross monthly income goes toward paying off debt.
But that doesn’t mean you can’t still get help to make your payment. You can use gifted money (from parents, relatives, etc.), but you might need to provide confirmation that the funds don’t need to be repaid.
Myth #3: The down payment is the only money you’ll need at closing.
In addition to your down payment, you should be prepared to pay closing costs, which are usually 2% to 5% of your home’s purchase price. Closing costs include fees paid to your lender, like discount points, and sometimes an origination, application fee or a processing fee. Closing costs may also include fees for third party services, such as the costs of the appraisal, property survey, title search, insurance, attorney, credit bureau, flood certification, tax certification, and recording/state fees.
Note: Unlike most big banks and lenders, Ally Bank doesn’t charge lender fees. This means you won’t pay for the application, origination, processing, or underwriting of your loan.”
Myth #4: You can’t get a mortgage with student loans.
Paying back student loans can certainly make it more difficult to save up for a down payment. But they don’t disqualify you from getting approved for a mortgage. Remember, a number of mortgage options let you make a down payment less than 20%.
If you have student loans, aim to keep your DTI ratio low by avoiding unnecessary credit card or other debt. You can also lower your DTI ratio by increasing your income through a side hustle or second job. And keep your credit score healthy by paying all your bills on time.
Myth #5: You need great credit to buy a home.
Typically, the higher your credit score, the lower interest rates you’ll qualify for. Why? A high credit score indicates to your mortgage lender that you’re likely to repay your loan on time.
A score of 740 or above is often considered excellent and will help you qualify for a lower down payment requirement and lower interest rate. The minimum accepted score for most conventional loans (those that aren’t backed by the government) is 620, but options exist (like FHA loans) that let you qualify with a score as low as 500.
Myth #6: Buying a house on your own is as effective as working with an agent.
While there are resources available today to aid you in purchasing a home on your own if that’s the route you decide to take, the process of buying a home can also prove to be rather worrisome for many homebuyers. Working with an experienced real estate agent — especially in a hot housing market — can certainly ensure that you’re prepared to address any matters you’re unfamiliar with throughout the process and help increase your odds of landing the home you want. To identify the right agent for you, you might need to interview at least a few before making a final decision. Read online reviews, ask to talk to former clients, and most importantly, inquire if the agent has recently closed on properties similar to what you’re looking for in terms of both price tag and location.
You’ll also want to check for a personality fit, too. Do you want someone who is patient and will guide you through the process? Or do you want someone who works fast and is straight to the point? Go with an agent that will suit your shopping style, so you can make the most of this critical relationship.
Myth #7: You don’t need a home inspection.
While it may cost a couple hundred dollars to have a professional thoroughly inspect your potential new property, this step might save you even more money and headaches down the line. A home inspection can uncover issues you probably wouldn’t be able to detect on your own (think: structural issues, problems with the plumbing system, or insect infestations). If the findings are significant enough (like a major crack in the foundation), you may be able to back out of your contract without penalty. Or you could choose to ask the seller to fix the issues for you or reduce the price you have to pay.
Myth #8: You should only apply to one mortgage lender.
Your new house shouldn’t be the only item on your shopping list — and we’re not talking about new furniture or décor. When you’re buying a home or refinancing, you should always shop around for your mortgage as well to ensure you don’t settle for a not-so-great rate. That means comparing rates from several banks, credit unions, or mortgage companies.
Rule of thumb says to get a loan estimate from at least three or four lenders. You might even want to get pre-approved by multiple lenders as well. While this process may take a little time and effort up front, getting even a slightly lower interest rate can save you thousands of dollars in interest payments over the years.
If you have a preferred lender (for instance, if you’re ever refinancing, you may be inclined to stick with your current lender), check if they’ll match the lowest offer.
Myth #9: You’ll probably pay the listing price or negotiate it lower.
If you’re looking to buy in a seller’s market (a.k.a. a hot market), where demand is high and supply is low, you could end up having to bid and pay more than a property’s list price. When there’s competition, sellers have options — and a higher bid can help you stand out from other interested buyers.
If you’re shopping in a hot market, you’ll probably want to look for houses listed below your budget. A good real estate agent can help you navigate your home search to make sure you find something that fits your needs and you budget.
Myth #10: You should avoid ARMs.
An adjustable-rate mortgage (ARM) is a home loan that has an initial low interest rate for a fixed term (often 5 or 7 years) that then resets periodically (ex: once a year) after that. These loans are attractive because of low interest rates at the beginning of the term, but the potential for rates to increase after the fixed term can make them riskier than fixed-rate loans, and since the 2008 housing crisis, they’ve had a bad rap.
If you are planning to move or refinance within a few years (i.e. before your fixed-rate term ends), ARMs can actually be a strategic move. You’ll potentially save on interest early and won’t have to deal with the risks of the variable rate later.
When you’re buying a home, knowing all your options (and taking advantage of them) is key. Many of these myths can make you feel constrained, whether it’s tying you to a 20% down payment or holding you to one mortgage lender option. But by understanding the ins and outs of the home purchasing process — and saying goodbye to the falsehoods — you can make this a positive experience for both you and your wallet.
Ready to apply and save some cash? Ally Home makes it easy to save on your home loan with competitive rates and no lender fees.