Debunking the Most Common Home Buying Myths and Why It May Be the Time to Buy!
April Gould, December 11, 2023
If it turns out to be the peak for interest rates before a long decline, then buyers can refinance later to a lower rate. And they’ll benefit from having bought at a time when higher rates discouraged some competing buyers. If it turns out to be a plateau on the way to even higher rates, then buyers will be happy to have locked in today’s rates.
If you have been on the fence about homeownership, it may be because there are so many opinions and misconceptions out there when it comes to buying a house. While family and friends may mean well, what makes financial sense for them might not apply to your unique situation. Buying a home is one of the biggest investments you will likely ever make, and it is best to be as informed as possible. Read on as we dispel some of the most common homebuying myths.
Myth: You need 20% down
Historically, one of the biggest barriers to homeownership was the down payment requirement. For many aspiring homeowners, there is a long-held belief that a hefty 20% down payment is necessary to buy a house. However, this is just not the case!
So where did this 20% down myth come from? Well, this is based on the conventional loan requirement to have at least 20% down to avoid paying Private Mortgage Insurance (PMI). PMI is an insurance premium that protects the lender’s risk against potential default on the loan. For those who put less than 20% down, PMI will be paid up front or as part of the monthly mortgage payment. So, while it may be desirable to put 20% down and not have to pay PMI, the actual minimum down payment requirement for conventional loans can be as low as just 3%!
For most Americans, saving up a significant amount of money can be a struggle. If a conventional loan isn’t the right option for you, FHA offers flexible credit guidelines and 3.5% down, while USDA Rural Development (RD) loans require 0% down for those buying in designated rural areas and Veterans have access to 0% down loans backed by the U.S. Department of Veterans Affairs.
Additionally, there are down payment assistance programs like the Chenoa Fund for FHA loans and The National DPA for conventional loans, as well as many state-specific down payment assistance programs.
Myth: You need a really good credit score
Your credit score is based on your past payment history and borrowing behavior. Typically, the higher your score, the more likely it is you will be approved for a mortgage and the lower your interest rate will be. But your credit score is only one of many factors to qualify for a loan. Lenders look at the overall financial picture and take into consideration your debt-to-income ratio, your down payment amount, your work history, the type of mortgage you’re applying for and the property’s condition and value.
Those with less than perfect credit can still obtain a mortgage. Depending on what city you live in, it may be tougher to rent with poor credit than it is to buy a house! For example, a recent article on Equifax.com states that “landlords may consider a renter’s credit when evaluating a potential tenant. The minimum credit score requirement for a renter varies, but landlords generally prefer to see credit scores of 670 or higher”. Rent Café did a recent study on cities with a competitive rental market and found that those rejected from renting in San Francisco had credit scores of 611 or less and in Boston, the average rejected score was 667 or less.
Compare this with buying a home. For conventional loans, lenders like to see a credit score minimum of 620 and allow scores as low as 580 for FHA, VA, and USDA RD loans.
Myth: Renting is cheaper than buying
Sometimes this might be the case. If you can find housing that allows you to put aside money each month to grow a nest egg or make investments, then it may be more cost effective to continue renting. Most Americans today, however, are not increasing their savings and/or investments and are finding that rent has skyrocketed along with home prices.
As a long-term financial strategy, homeownership offers benefits renting does not. Here are some key points to consider:
-Potential for Appreciation and Equity Building
While market fluctuations occur, historically, real estate appreciates in value over time. When you rent, only the landlord gets the benefit of equity!
The specific tax breaks that apply to you as a homeowner will vary based on your state, filing status, income, and other factors. But in general, you can deduct mortgage interest paid, a portion of your paid property taxes, costs incurred to make your home more energy efficient, and a portion of costs incurred to modify the property to help with aging in place. This can potentially save you thousands in taxable income, a benefit not available to renters.
Although the laws may vary by state, in most parts of the country, a landlord may raise the rent at their discretion. Typically, there are no limits to how often this may occur or by how much. This means you may have to pay significantly more to stay put. When you buy a home, your monthly mortgage payment is fixed based on your loan term (such as 15 or 30 years) and doesn’t change over time. This allows you to manage a budget and grow your investment as you pay down the principal.
Myth: Applying for a mortgage will hurt your credit score
There are two types of credit inquiries: a hard inquiry, known as a hard pull and a soft inquiry, or soft pull.
A hard pull occurs after you have applied for a loan and the lender pulls your credit report from either Experian, Equifax, or TransUnion in order to take an in-depth look at your credit history. This type of inquiry occurs any time you apply for a new credit card, a personal loan, a mortgage, or a car loan. Hard pulls can cause a dip in your score, but according to Experian.com, the dip is usually less than five points and only temporary. Applying for a mortgage shouldn’t cause significant damage to your credit score.
Additionally, with mortgages specifically, your credit won’t be dinged multiple times if you shop around with different lenders. Credit scoring agencies give a limited time (45 days from first credit pull) for multiple lenders to pull your credit and will count this as just one event, instead of multiple events, to minimize the effect on your score.
A soft pull is more of a brief look at your credit report. Some examples include getting prequalified for a mortgage (not to be confused with getting pre-approved, which includes a hard pull), an employer running a background check, or when you request to review your own report. Soft inquiries do not affect your credit score.
Myth: It is better to hold off on buying until interest rates drop
You may have heard the saying, “Date the rate, but marry the home.” This references the fact that mortgage rates have always fluctuated, but the right home can be forever, or at least long-term.
Historically, interest rates were much higher in the ’70s and ’80s. In fact, according to the historical interest rate data published by Freddie Mac, interest rates climbed to 18.6.3% in October 1981!
Jeff Tucker, Senior Economist at Zillow, recently stated “If it turns out to be the peak for interest rates before a long decline, then buyers can refinance later to a lower rate. And they’ll benefit from having bought at a time when higher rates discouraged some competing buyers. If it turns out to be a plateau on the way to even higher rates, then buyers will be happy to have locked in today’s rates.”
Therefore, interest rates should not be the only deciding factor in whether to buy a house or not. If you find a home that works for you, you may be able to get a lower rate through a temporary buy-down, an adjustable-rate mortgage, or by paying points.
Here are a few reasons why it makes sense not to wait:
-Homeownership is an investment
No matter which way the real estate market is leaning, the sooner you own a property, the sooner you start to build equity. Delaying homeownership means missing out on years of equity growth. If you currently rent, you are essentially paying someone else’s mortgage. Why continue to build wealth for your landlord instead of yourself?
-More than a transaction
Buying a home is more than just a financial transaction. Life events such as relocating for a job, getting married or divorced, wanting to establish roots, or growing your family, etc., are the reasons to buy a home. In a nutshell, the best time to buy a home is when it makes sense for you and your budget!
-Lifestyle stability and personalization
Owning a home offers stability and a sense of community. It also gives the ability to create a space tailored to your own preferences, something that renting often restricts.
While buying a home in today’s market may seem challenging, it is possible. The current housing market offers numerous reasons why potential homebuyers should not be afraid to pursue homeownership in 2024. The best place to start is by reaching out to a knowledgeable MiMutual Mortgage Loan Officer who can clear up any misconceptions or myths and customize the right loan program for your unique situation!
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