Popular Mortgage Myths Debunked

When you’re preparing to apply for a mortgage loan, it seems everyone around becomes a lending expert. There are a lot of mortgage myths floating around out there. This month, I identify some of those myths and debunk them so you can make an informed decision for yourself.

Myth: Even people with good credit are having a hard time getting loans.
Fact: Although certain loan programs have been eliminated, any borrower with good credit, a stable income, and the cash necessary for the down payment and closing can obtain a mortgage loan.

Myth: Applying with more than one mortgage lender will damage your credit.
Fact: You can apply with multiple mortgage lenders; the key is to do so within the same 45-day period. Multiple inquiries within 45 days count as one inquiry.

Myth: You need to put at least 20 percent of the cost of the house down to buy a house.
Fact: The Veterans Administration (VA) and the U.S. Department of Agriculture (USDA) offer zero down for borrowers who qualify. The Federal Housing Administration (FHA) offers loans for 3.5 percent down, and conventional loans are available for 5 to 10 percent down. Loans with less than 20 percent down require mortgage insurance, so if you can put down 20 percent, you’ll avoid this added expense.

Myth: FHA loans are only for first-time buyers.
Fact: FHA loans are available to all homebuyers who meet the minimum credit score requirements and maximum loan size ($271,050 in Nebraska). To qualify for an FHA loan, you must have a good credit history for at least the past two years, your income must be consistently increasing, you must have a steady employment record (two years or longer with the same employer), and the mortgage payment must be 30 percent or less of your gross income.

Myth: I can’t refinance because my house declined in value.
Fact: Mortgage programs are now available that allow an appraisal waiver in many cases to those who qualify. These guidelines were changed to allow homeowners who have paid their mortgage on time to take advantage of the current low interest rates.

Myth: A 15- or 30-year fixed-rate mortgage is the best way to go.
Fact: If you’re like some people and you’re buying a house you want to grow old in, then a 15- or 30-year fixed-rate, long-term mortgage is the best option. However, the average person stays in a house nine years. If you know you’re buying a starter house that you’re going to sell, say, in nine years, then an adjustable rate mortgage (ARM) might be the way to go. You’ll hear a lot of warnings about ARMs, and some of them are true. However, an ARM can be a good choice if you look for one with a fixed introductory rate for three, five, seven or 10 years — the amount of time you plan on staying in the house. Then, sell the house before the interest rate increases.

Myth: You should pay off your mortgage as quickly as possible.
Fact: It’s best just to accept that you have a mortgage and sleep well at night. For some people, however, they don’t like such a huge financial obligation hanging over their heads, so they try to pay off their mortgage as quickly as possible. But before you go putting your annual bonus into the principal owed on your home, take a step back and think like financial expert: Your mortgage loan interest rate is probably around 5 percent, give or take a couple points, while your credit card interest rates are likely much higher than that. If you want to make the best use of your money, pay down debt on high-interest accounts rather than on your mortgage.

Myth: You can’t get a mortgage if you have black marks on your credit.
Fact: If you have excellent credit, you’re going to have an easier time obtaining a mortgage loan and getting a low interest rate than if your credit has blemishes. However, even if you have marks on your credit, you can obtain a mortgage loan. You’re just going to pay a bit more interest on it. If you have perfect credit and a credit score above 740, then you qualify for the best available interest rates. For scores below 740, interest rates are increasingly higher as the score approaches 620. FHA loans are more forgiving on credit scores and are a better option for many buyers with marks on their credit. If you have a bankruptcy or foreclosure on your credit history, you may have to wait before obtaining a mortgage loan depending on how much time has passed since the bankruptcy or foreclosure.

Myth: If one lender turns you down, they all will.
Fact: Not necessarily. Different lenders offer different types of loans and have different requirements for credit scores and debt ratios. Some lenders only accept borrowers with the very best credit and highest credit scores. The best thing to do is to find out your credit score and do some footwork with a couple different lenders to determine the one for you.

Myth: If you refinance, your loan term is extended by 30 years.
Fact: Many homeowners don’t refinance because they don’t want to make another 30-year commitment or because they want to pay off their home before retirement. If you refinance, however, you can still achieve a lower monthly mortgage payment and amortize your payments so you’re right on schedule with your current loan. In some cases, you may be able to refinance to a 20- or 25-year loan for about the same payment you have now.

Sources
1. Ryan Shoemaker, CMPS®, The Private Mortgage Group, Omaha.
2. “6 Mortgage Myths That Can Cost You Money,” by Holden Lewis, Bankrate.com.