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7 common mortgage myths

The top misconceptions when looking for a home loan—and the real answers to these mortgage myths

When you’re purchasing a home, all the details of the mortgage process may become overwhelming. It’s important to recognize some information may not always be accurate, or apply to your individual situation.

Here are some common mortgage myths and the truth behind them.

Myth No. 1: Pre-qualification means you're approved and you'll get the loan

You’ve met with a loan officer and been pre-qualified for a loan, and you might assume that your mortgage process is over. But a mortgage pre-qualification is not a binding agreement, and often the lender will require additional information before issuing the loan. Pre-qualification gives you an idea of how much you can borrow before you start looking at homes and shows sellers that you are committed and are able to afford the home. Some mortgage brokers and lenders will issue pre-qualifications that have not been reviewed by an authorized underwriter, so be sure to ask before you move forward with your home buying process.

Myth No. 2: You need to have perfect credit

Buyers with poor credit might face an uphill climb. But even with a less-than-perfect credit score, you may qualify for a mortgage provided the lender is satisfied with your overall financial situation. You will need to provide documentation and information, including your debt-to-income ratio and other figures. You may be able to avoid higher rates if you work on improving your credit score before you start shopping for a home.

Myth No. 3: Your mortgage payment must be 28 percent of your income

You may hear a rule of thumb that your mortgage payment should equal 28 percent of your income. But the truth is that a simple percentage can’t encompass all the variables involved in this big financial decision. When determining the monthly mortgage payment you can afford, consider factors such as your regular monthly expenses, how much debt you already carry and your other savings goals.

Myth No. 4: You must put 20 percent down

Traditionally, lenders have required that borrowers make a 20 percent down payment on their house. These days, borrowers may be able to put down substantially less. One question to ask your mortgage lender is whether you’re eligible for special programs offered to first-time buyers or veterans that may reduce or even eliminate your down payment, such as Federal Housing Administration (FHA) loans that allow a 3.5% minimum down payment or Department of Veterans Affairs (VA) loans where qualified borrowers can put zero down. Find out more about FHA and VA loans.

That said, it’s generally smart to pay as much as you comfortably can up front since that reduces both your monthly payment and the amount you’ll pay in interest overall. It’s also important to note that for conventional financing, if you don’t make at least a 20 percent down payment when you buy your home, you will likely need to pay private mortgage insurance (PMI). Make sure you know how much this cost will be and factor that into your monthly home payment budget.

Myth No. 5: 30-year mortgages are the best option

30-year mortgages are the traditional choice and typically offer the lowest monthly payments, but they’re not necessarily best for everyone. If you can afford the higher payments associated with a 15-year mortgage, you’ll wind up saving a lot in interest over the life of the loan. You can also consider an adjustable-rate mortgage, which has an interest rate that periodically changes. When the rates change, generally, your monthly payment will increase if rates go up and decrease if rates fall.

Myth No. 6: You can compare mortgages based on their advertised rates

If one advertisement touts a 3.5% interest rate and another promotes a 3.6% rate, you might assume that the first one is a better deal. However, some advertised rates may include fees, other charges and points. Points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate, which can lower your monthly mortgage payments. Given the variables, a better point of comparison is the annual percentage rate (APR) which includes fees and other charges and is generally listed along with the interest rate. When looking at interest rates and APR, be sure that you are comparing apples with apples.

Myth No. 7: It's always better to own

There are many advantages to owning a home. For example, your home’s value may appreciate, and you can typically deduct mortgage interest from your taxes. But sometimes it’s better to concentrate on improving your credit or saving for a bigger down payment before you make the leap to buy. Just because you can get a mortgage doesn’t necessarily mean you should take on this financial obligation immediately.

Learn more about mortgage options.