What we'll cover
The down payment you actually need
The ways your credit can affect homebuying
How student loans factor into a home purchase
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. Not everything you hear about homebuying is accurate.
Myth #1: You have to put 20% down
When it comes to down payments, it's often recommended you make a down payment that's 20% of your home's value. But that amount 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 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%.
Read more: Shopping for a home loan? Discover which mortgage type is right for you.
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. 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.
But that doesn't mean you're on your own. 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.
In fact, several mortgage programs accept lower down payments — even as low as 3%.
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. Determine how much house you can afford, and then start searching for the home of your dreams.
Myth #4: You can't get a mortgage if you have student loans
Paying back school 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. If you have student loans, aim to keep your DTI ratio low by avoiding unnecessary credit card or other debt.
Myth #5: 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, which could give you the ability to back out of your contract without penalty (should you need to) or ask the seller to fix the issues or lower the price.
Myth #6: You should only apply to one mortgage lender
When you're buying a home or refinancing, you should always shop around for a mortgage to ensure you get the best possible rate. That means comparing rates and terms from several banks, credit unions and/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, ask if they'll match your lowest offer.
Separate fact from fiction
Information about homebuying can be overwhelming. Don't take everything you hear about the process at face value. Have a critical eye to identify any myths so you can focus on the real facts.
