7 Common Myths About Home Loans

For the average American, buying a home is one of the top items on a bucket list. Buying a home means putting down roots in what might be the largest purchase you'll ever make.

Before you decide buying a home is out of your league, let us help you separate mortgage facts from myths so that you take the proper steps to secure your first mortgage loan.

Myths usually come from a combination of misinformation and self-doubt. Avoid these seven top excuses created by common mortgage myths.

1. I can't get a mortgage, I have student loans

You can't throw a rock in the US without hitting an American with student loans. Over 44 million Americans have student loan debt adding up to trillions of dollars.  

Still, more than half of Americans own a home. Student loan debt is no barrier to getting a mortgage loan on its own.

Yes, paying off debt is a great sign you can manage a loan payment responsibly, but it is an unrealistic requirement for everyone who applies for a mortgage. Mortgage brokers look at your overall debt to determine how much house you can afford.

Instead of worrying specifically about your student loans, consider your overall debt-to-income ratio. Mortgage lenders use this ratio to determine whether you are a high risk for foreclosure.

The best debt-to-income ratios fall below 43 percent. This means that your total monthly debt payments--including credit cards, student loans, car payments--equal less than half of your monthly income.

Some lenders allow up to a 55 percent debt to income ratio. Guard against entering a mortgage with this much debt. The lower your monthly debt, the more you'll have available to take care of unforeseen house expenses each month.

If your student loan can be restructured to create a lower payment before you shop for a mortgage loan, you have a better shot at getting approved for a mortgage.

2. I haven't saved enough money

One common excuse to not buying a home is not having enough money saved. This is because conventional mortgage wisdom says buyers need to put down 20 percent on a loan.

There are a variety of loans including FHA, or Federal Housing Administration, that allows you to put down less than 10 percent on a mortgage. If you meet the minimum credit score requirements for FHA, you can put down as little as 3.5 percent on your mortgage loan.

FHA loans are offered through a wide variety of mortgage lenders in 15- and 30-year products. These loan types are popular for first-time homebuyers and homeowners with lower income.

The downside to purchasing a new home using an FHA loan is that you are required to pay annual mortgage insurance. This amount is typically 1.5 percent of the overall balance of the loan.

Private mortgage insurance is required for any loan where the buyer puts down less than 20 percent. When shopping for a loan, request information on loan programs that allow you to put down less than a conventional loan.

Compare the annual cost of private mortgage insurance to your ability to save long term. If you can't realistically save 20 percent in the next decade (plus what the house would appreciate by), it might be worth considering making smaller Private Mortgage Insurance payments each year depending on the growth of your neighborhood.

3. Shopping for a loan hurts my credit score

Whenever your credit is pulled for a loan, your score can take a (small) hit. But shopping for loans in the same category won't cause your score to lose points.

As long as you shop for lenders within 14 days of your first inquiry, your score won't be affected. Avoid applying for any new credit while getting preapproved for a mortgage loan.

Trying to buy a new car or open up a new credit card not only means lowering your score but potentially sabotaging your approval process. Lenders frown upon new debt while they are vetting you as a potential borrower. Save your new car purchases until after you get a mortgage loan.

Auto loans are some of the easiest to acquire (and negotiate). You don't run the same risk of shooting yourself in the foot by waiting until after you secure a mortgage.

4. My credit score isn't good enough

Great credit scores get you the best terms on home loans for your particular situation. This fact doesn't mean you shouldn't apply for a mortgage loan.

Most lenders consider FICO scores under 640 high risk, but with a score as low as a 580, you can qualify for an FHA mortgage loan. No matter your credit score, don't assume you have to settle.

A low score limits your options but doesn't eliminate them. Shopping around for the best mortgage terms means connecting with more than one lender to get the rate you want.

If your desired payments are completely out of reach right now, you can always refinance once your credit score improves over time. Keep in mind that there are no permanent loans in the mortgage industry.

A mortgage loan is a product. If you don't like how your current product affects your finances, you can take steps toward getting a better deal that suits your financial goals.

5. I'm preapproved so I got the house

Getting preapproved for a mortgage loan is an important first step in home buying. The emphasis here is "first" step. Many realtors encourage clients to get preapproved to see how much house they can afford.

There is more to affording a house and getting a home loan that the initial preapproval application. Loan underwriters look into your financial habits, legal standing and income to determine whether you qualify for a home loan.

Length of employment could cause a loan denial even if you earn a high income. Shopping around is key.

A dealbreaker with one lender isn't necessarily a dealbreaker with another. Consider yourself on a marathon when you begin the approval process for your dream home.

Look for multiple resources to qualify for the loan you need to secure the property before it goes back on the market.  

6. I don't need to get preapproved because I got prequalified

Getting prequalified for a loan takes minutes. Answer a few questions online, and you receive an estimate of how much house you can afford and what a potential rate could be.

Prequalification is an acceptable final step when you aren't serious about buying a home but are curious to how much you may be able to purchase. Before talking to a realtor or making an offer on a home, it's important to get preapproved.

The preapproval process isn't a final step either, but it is far more involved than getting prequalified. During the preapproval process, the lender vets your financials to give a more accurate picture of the range of houses within your budget.

Remember prequalification is great for general research. As you become serious about buying a home, you need to get preapproved.

7. I already know I can afford a mortgage loan because I make a lot of money

Income is one of several factors that determine your ability to qualify for a mortgage loan. Don't assume that earning a lot of money each year solves all your mortgage problems.

Carrying lots of debt or a poor credit score can be signs of high risk to a lender. If you've made some poor financial decisions recently, give yourself time to begin making on-time payments or reduce debt before getting preapproved.

Your high income can grant you access to the home of your dreams as long as you show good habits and the proper management of debt. Unlike low-income borrowers, you have more choices in how to manage the money coming in which gives them a peek at how you'll treat your future mortgage.

More Than Just Mortgage Facts

Shopping for a home can be stressful when you aren't making decisions from mortgage facts. Banks offer mortgage products to help fit the needs of specific demographics they want as customers.

If a lender doesn't approve you for a mortgage loan, it isn't necessarily a reflection on your financial situation. You might not be the best fit for that lender. Getting approved doesn't even mean you have to use that same lender.

Explore your options by researching lenders nationwide who have mortgage resources available to help you land your dream home. Remember you are the customer shopping for a product.

Take charge of your mortgage search by setting goals on the terms you want and vetting lenders as much as they are vetting you. If you're ready to take that first step to get a mortgage that works for you, click here.

At Seattle's Mortgage Broker, we specialize in Washington Real Estate, we will help you find lenders with experience and integrity.

Contact us today.