There are so many myths surrounding mortgages, it can be intimidating for homebuyers. At Eave, we believe buying a new home should be a joyful experience. We also believe the homebuying process—from applying for a home loan, to making your monthly mortgage payments—should be transparent.
To help make home buying more approachable, we’ve debunked some of the most pervasive myths about mortgages. Here’s what you need to know:
Myth: Applying With Multiple Lenders Affects Your Credit
When you’re applying for a mortgage, you want to keep your credit score in tip-top shape. It’s a good idea to keep your credit card balances below 30 percent, and to avoid making any big financial moves that could affect your debt-to-income ratio (like taking out a loan for a new car).
Credit inquiries are a necessary part of applying for a mortgage, but they do put a small dent in your credit score. For most people, one additional credit inquiry will shave less than five points off their FICO Scores. Why? Inquiries signal to creditors that you’re thinking about taking on new debt, explains the Consumer Financial Protection Bureau.
But what about rate shopping? The truth is, it’s possible to shop around for a mortgage without it hurting your credit, so long as you do it within a 45-day window, explains the CFPB. Within this 45-day period, multiple credit checks from mortgage lenders are counted on your credit report as a single inquiry, allowing you to get pre-approvals and Loan Estimates from as many lenders as you’d like.
Myth: You Need 20 Percent Down To Buy A Home
The average down payment for first-time homebuyers is 5 percent, according to a report from the National Association of REALTORS®. Sellers are able to leverage the cash they’ve earned from their home sales to put an average of 14 percent down on a new home. But, altogether, the median down payment is 10 percent, according to the The 2017 NAR Profile of Home Buyers and Sellers.
If you’re waiting to reach a 20 percent down payment goal, you could be missing out on ideal market conditions and letting the best interest rates surpass you. Even if you can afford to put 20 percent into a down payment, it might make better sense to keep some of your funds liquid. Of course, there are benefits to making a large down payment. A 20 percent (or larger) down payment can significantly reduce your interest rate, saving you thousands over the life of the loan. The truth is, there is no one-size-fits-all down payment. Everyone’s financial situation is different. Always consult with a trusted financial advisor before deciding how much to put down on your new home.
Myth: Once You’re Pre-Qualified, You’re Good To Go
The terms pre-qualified and pre-approved almost sound as though they could be interchangeable. But there’s actually quite a big difference between the two. Being pre-qualified for a home loan is simply an initial step that gives you a ballpark idea of how much you’ll be able to borrow. You provide information about your financial situation, such as your income, credit score, assets and debt, and you can become pre-qualified. But pre-approval occurs when your financial information has been assessed and verified, making you a stronger buyer, and more likely to get to the closing table.
Myth: You Need A Perfect Credit Score To Get The Best Rate
Trying to polish your credit score and get it above 800 isn’t necessary when it comes to qualifying for the best mortgage rates. Plus, if you’re waiting for your score to ascend to the 800 club, or even go up 10 or so points, you could be letting good rates and ideal market conditions pass you by.
Economists are predicting that mortgages rates will go up in 2019, with one model forecasting they’ll reach 5.5 percent by the end of the year. A score of 760 or higher will help you secure the best rates for loans. If you’re above 760, that’s great, because you’ll have a buffer in case your score fluctuates between being pre-approved and getting to the closing table. If your score isn’t 760, that’s OK, too, because you can still qualify for competitive rates.
Myth: You Should Always Pay Your Mortgage Off Quickly
Congrats! You’ve got a mortgage. You may have heard that you should pay it down as quickly as you can. But, this is outdated advice that doesn’t make much sense in today’s economy. Why? We are seeing historically low interest rates. In fact, a mortgage is likely the cheapest money you can borrow. Where else can you get a million dollar loan at 5 percent for 30 years? Plus, the interest you pay on your mortgage is tax-deductible and making regular monthly payments on a mortgage account will have a positive impact on your credit score, lengthening your credit history. Taking the money you would otherwise use to pay down your mortgage faster, and investing it instead, could actually make you more money. Always talk with a financial advisor first, but know that you have options.
At Eave, we skip the flimsy pre-quals, and fully assess your financials within 24 hours of application. Our Conditional Eave Approval is stronger than a traditional pre-approval. In fact, 90% of our clients have won the first home they’ve bid on. Apply today.