Unless you’re living under a rock, you’ve heard that interest rates are at an historic low. On top of that, the Federal Reserve recently indicated its intention to keep interest rates low for the remainder of 2019.
And that means now could be the optimal time for you to buy a home. Owning your home is still the American dream. And there are some big reasons it makes sense to buy now (even though the mortgage interest deduction was eliminated from the tax code last year). For starters, you stop throwing money away on rent and start building equity in your own place. And there’s a reason why many wealthy individuals invest in real estate – houses typically appreciate in value and often above the rate of inflation which means there’s a good chance you’ll benefit from market appreciation when it’s time to move on and sell.
As an agent, I constantly run into misinformation about home-buying. Let’s shed some light on the 6 most common myths potential home-buyers often believe:
Myth #1: “I Have To Put Down 20%”
Saving 20% of the price of a home as a down payment isn’t just a hurdle; it’s an unachievable challenge in many parts of Maryland. It might surprise you to know that the median down payment for first-time buyers nationwide is just 7%. There are many loan programs you may qualify for which allow you to buy with a low down payment:
- FHA Loans:The Federal Housing Association (FHA) is a government program that offers loans with as little as 3.5% down. Like any program, you’ll have to qualify and be approved, but 3.5% sure beats trying to save 20%. Just keep in mind that unless you put 20% down with any loan program, the government requires you to carry private mortgage insurance which is an additional component cost of your monthly payment.
- Down payment assistance grants and loans: While the varieties of these types of programs are too numerous to cover here, many local and state agencies sponsor down-payment assistance programs that help first-time home buyers, some that are grants and others that are loans that don’t need paid back if certain criteria are met. You can find out more at this website, NeighborWorks. I can also recommend a few lenders who have a complete understanding of the ins-and-outs of these programs and can make sure you take advantage of what you can qualify for.
- VA, USDA, and Navy Federal Credit Union loans:Three government-related lenders offer mortgages with as little as zero down. You’ll pay a slightly higher interest rate for these loans, but if you qualify, it’s certainly worth looking into. The VA is for veterans and family members. The USDA is for buyers in qualifying locations (typically in rural areas). And Navy Federal Credit Union is for the military, family members, and some government employees.
- Gift Funds:An average of sixteen percent of buyers ask friends or relatives to help them purchase their first home with a monetary gift. Talk to your lender first, though. There may be limits to the amount of gifted funds you can accept and still qualify for your mortgage. And, your benefactor may be required to sign some paperwork as well.
Myth #2: “My Low Credit Score Means I Can’t Buy a Home”
So, your credit history has a few dings. That doesn’t mean you have to forgo your home-buying dreams. Here are some options for those with a less-than-stellar credit score.
- FHA loan. With a credit score of 500, you can apply for an FHA loan, but you’ll need a 10% down payment to offset the risk. If your score is a tick better (580), you can participate in their down-payment assistance program, requiring only 3.5%.
- Offset your credit score with a higher down payment. If you’re burdened with a lousy credit score, save more money for your down payment. A higher down payment can help those with lower credit scores become less risky for lenders.
- A Co-Signer. Find someone with better credit to co-sign the loan – but understand that if you don’t make the payments, that relative who was kind enough to co-sign for you will be financially responsible (and their credit will also suffer if payments are late or not made).
- Check your credit report. Maybe your credit score isn’t that low after all. You can check on it as often as you like absolutely free at CreditKarma.com. You can also order a copy of your report from all three reporting agencies (Equifax, TransUnion, and Experian) at www.annualcreditreport.com. It’s important to check at least annually, and if you find inaccurate or old information, be sure to ask the agencies to correct it.
Myth #3: “I Can’t Afford the Agent’s Commission”
Here’s one you can immediately mark off your worry list. In most real estate transactions, the commission is paid by the seller. That is one of many reasons to find and work with a buyer’s agent.
The listing agent represents the seller’s interest, 100%. A major part of the loyalty he provides to his seller is financial – he wants to get the highest possible price for the home. As a buyer, your interest is to not overpay for the home. You deserve to have your interests represented by an agent who works for you.
And since the seller typically pays commission for both sides of the transaction, hiring your own agent won’t cost you a penny! There’s no prize for going solo. Hire a licensed agent, someone who facilitates real estate transactions as their profession, to advise and represent your interests as they lead you through the entire process.
Myth #4: “My Bank Will Give Me the Best Mortgage”
There are a lot of positive things to say about working with your local bank. However, assuming they’ll give you the ideal mortgage is a mistake.
Banks are only one type of home-loan lender. Others include credit unions and mortgage companies. Mortgage features and rates aren’t the same across the board, so contact several financial institutions to get educated and ensure you’re getting the best product for your particular circumstances at the best interest rate.
You can also consider getting a loan through a mortgage broker. Brokers have access to several lenders, and they’ll shop their market, getting you a wider selection of loans. But unless you contract with one, brokers aren’t obligated to find the best deal for your situation. So, you’ll want to shop around for a broker, just as you would for a lender.
Myth #5: “I Was Pre-Approved. I Got The Loan!”
No…not at all! Getting pre-approved is a necessary step, but it doesn’t mean you have qualified for the loan. You don’t get the loan until:
(1) The seller accepts your offer
(2) Your lender provides final approval of the loan
(3) You sign the loan papers
Your lender will run your credit and debt-to-income scores the day before or the same day of settlement to make sure you still qualify. Between steps (1) and (3), the lender will have the home appraised to ensure its value is in line with the purchase price and ask you for a ton of documents (w-2’s, tax returns, bank statements, etc.) to verify your pre-approval status is backed by real qualifications.
So, what does “pre-approved” mean for a loan? First, it tells you how much house you’re likely to qualify to buy which helps you and your agent target the homes you can afford when house hunting, and just as importantly, it shows sellers you’re a qualified and serious buyer. This gives them confidence when you make a purchase offer that you are financially qualified to deliver on your offer and get to the settlement table.
Myth #6: “The Interest Rate Is What Matters Most”
A low interest rate is important, but it’s not the only thing to consider. When shopping around and comparing one loan product to another, the important metric is the Annual Percentage Rate (APR).
The APR factors in the interest rate as well as ALL loan costs, including processing fees and origination points, which can vary widely from lender to lender. One lender may have a lower interest rate, but the up-front fees could end up costing you more than you’d save in interest if you went with a ½ percent higher with another lender.
So, once you’ve found the home you want to purchase and are ready to sign on the dotted line, ask each lender to give you a “loan estimate” which is a line-by-line estimate of fees. That’s where you’ll find the APR. And the APR is what allows you compare apples to apples.
There you go…the six most common home-buying myths are busted! And you may actually be closer to home ownership than you thought. Are you ready to stop paying rent and start paying yourself? I’d love to help you get started!
Feel free to reach out via phone, text (443-745-4806) or email (RL@sachsrealty.com). I’ll walk by your side through the entire home buying process. For starters, I’ll set up a property search criteria based on what you’re looking for and make sure new listings arrive in your email in-box the same day they come on the market.