This week, we had Chance Unger from VanDyk Mortgage stop by the Waypoint office to discuss the top 5 mortgage myths when purchasing a home.
Chance was very insightful into how many people may not understand the ins and outs of mortgage lending which allows them the ability to purchase a home.
So without further ado… here are the top 5 myths.
I Need to Put Down 20% to Get Rid of Mortgage Insurance (MI)
For a Conventional mortgage back in the day perhaps.
Nowadays, if you’re doing a Conventional mortgage you have lots of options to choose from when it comes to tackling how you want to deal with MI.
The most common way people will pay for mortgage insurance is monthly payments. This approach will have the borrower pay for monthly insurance until the Loan-To-Value (LTV) reaches approximately 78%, which at that point, the MI will come off.
However, you can put down 20% to bypass it.
Other Ways to Get Rid of MI
Another option would be what we call a “Split Premium”, where you pay for a portion of the mortgage insurance premium at closing. Then pay the remaining amount in a monthly payment that would be less than what you would pay on just the monthly.
Then, you have my favorite option which is what we call “Single Premium” MI.
Single Premium MI is where you pay for all of your mortgage insurance upfront at closing to get out of paying it monthly. How you pay for it can be handled a few different ways, but you have the option to pay it in cash or finance the premium into the mortgage.
The benefit of this is that if you were planning on putting 20% down originally you can still achieve the same result at a fraction of the cost, which means more money in your pocket!
Now, if you’re taking the FHA route mortgage insurance is handled a little differently and you don’t really have any options when it comes to that. Since that program is government backed you will need to pay mortgage insurance for the life of the loan.
VA, however, is a different story. For the veterans out there this is hands down one of the best programs available primarily because there is no mortgage insurance requirement for the borrower to pay.
My Credit Score Needs to be 800 to Get Approved
The stronger the credit score, the stronger the ability to get approved and get a better interest rate. But, depending on the loan program, credit scores down in the 600’s still have the capability of getting approved as long as all the other requirements are still met.
There are other parts of your credit that are analyzed besides just your score. For instance:
- How well are the trade lines (aka lines of credit) being maintained?
- Are you making your payments on time?
- Are there discrepancies that need to be addressed? (collections, late payments, bankruptcy, foreclosure, etc.)
- Are all of your credit cards close to being maxed out?
Overall, credit strength and worthiness are a very large consideration when it comes to loan approvals but you don’t need to have a record breaking credit score to still achieve home ownership.
I’m a First Time Home Buyer and Need Down Payment Assistance
Depending on what your situation looks like, Down Payment Assistance (DPA) may not be the best option for you. There are A TON of DPA programs available for First Time Home Buyers (FTHB) or anyone at that who needs some help with cash to close.
But, what you want to really look at is the overall picture when it comes to using these programs. How much money is it really costing you?
Don’t get me wrong, there are some programs out there that are amazing and if you qualify for it should definitely take advantage of it. However, make sure whoever is handling your mortgage for you really goes over the details on what program you use.
This varies between lender to lender, but you may find yourself paying a large amount of fees and a higher interest rate for using a DPA program, as well as, needing to pay it back!
Think of the classic saying “You have to pay to play”, in this situation here that may very well be the case. Some lenders may tack on origination points and other associated fees when working with a 3rd party.
Along with that, the entity that is providing the assistance may state that the borrower has to use an interest rate that they put out. Which, majority of the time, ends up being higher than the industry average.
So look at it like this, say you find a program that offers $7500 in down payment assistance and there’s about $2500 in fees to use that program; well at the end of the day you’re only really gaining $5000. Couple that with a higher interest rate and now it may not seem like the best deal after all.
It is Cheaper to Rent Than it is to Buy
This is probably one of the most talked about topics ever! “Why would I buy when I can just rent?”.
To be honest, sometimes renting may make more sense. It really boils down to what does that particular individual value. The freedom to move into a different environment every year or two? Maybe their job?
Whatever it may be, the major benefit that is being lost to renting is building up equity into a tangible asset.
I’ve done numerous breakdowns of how much someone is throwing away when renting versus paying their mortgage down and the numbers are staggering.
If you factor in the amortization, or principal mortgage reduction, and the appreciation, you can literally find yourself missing out on hundreds of thousands of dollars.
Now I’m not sure about you all, but I’m not one to just throw my money out the window like that.
If you purchase a home with a fixed interest rate guess what? Your principal and interest payment on your mortgage isn’t changing. If you’re renting? Most of the time your rent payment is increasing every year.
I Need to Find a Home First Before Talking to a Lender
The proper way to tackle any big decision like this is to do the research up front. Next, consult with your lender on your capability of being able to finance.
I see this more often than needed when someone gets ambitious and wants to get out there and start throwing offers out. Before putting yourself in a very uncomfortable bind, find out how much you can handle.
Getting pre-approved is what I would think to be the most important part of the process, and so would your Realtor.
Pre-Qualification Versus Pre-Approval
Now just to clarify there is a big difference between a pre-qualification and a pre-approval.
Sometimes, a lender may take an initial loan application with a client and determine if they are qualifiable to get a mortgage. Which, most of the time, is a superficial glimpse of the picture, but nothing more than that.
Being that a pre-qualification is the first step in the process, taking it to the next level would be to gather up the documentation needed to verify all the information on the application is accurate and then getting that in front of an underwriter.
I personally take the approach of getting an underwriter to give their stamp of approval on it before sending them out in the open. Believe me when I tell you that it saves all parties time, frustration, and money. Plus an agent, as well as a seller, will not take you seriously unless you are pre-approved if you don’t have cash.
Summing Up 5 Mortgage Myths
If you have any questions regarding the 5 mortgage myths or obtaining a mortgage, comment below!
You can also reach out to Chance through the following channels:
This blog was cowritten by: Chance Unger from VanDyk Mortgage.
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