Common Home Buying Myths

Thinking about buying a home, but feeling unsure about all the particulars? This is likely one of the largest purchases you’ll make in your lifetime. There is a lot of information floating around out there so it’s important to differentiate home buying facts from home buying myths.

Today, guest blogger Nichole Coyle, Certified Financial Planner^TM shares some common home buying myths and what you need to know if you are considering buying a home.

Home Buying Myth #1: You have to put 20% down

While having 20% to put down on a mortgage is something to strive for, it’s not necessary. Many loan programs only require 3-5% as a down payment and some loan programs (like the VA loan) offer options with 0% down.

However, outside of a VA loan, if your down payment is less than 20%, you will likely need to pay Private Mortgage Insurance or PMI. PMI may add an upfront cost as well as an additional monthly fee to your mortgage payment. PMI essentially protects your lender in the event you default on your loan. So, while it isn’t necessary, if you’re able to save up 20% for your down payment, you will see a benefit in the cost savings.

Home Buying Myth #2: You can’t buy a house if you have debt

Working to pay down debt can make it more difficult to set money aside for a down payment. That doesn’t mean it’s impossible, however. As previously mentioned in home buying myth #1, there are many loan programs that only require 3-5% down.

Your DTI, or debt-to-income ratio, will be a factor in whether or not you can be approved for a home loan. DTI will also be one of the factors in the interest rate you are offered. There is a general rule called the 28/36 rule which states that “your total housing costs should not exceed 28% of your gross monthly income and your total debt payments should not exceed 36%” according to Money.com. Following this rule aims to keep borrowers from overextending themselves on housing and other costs.

Though it’s not impossible to purchase a home while having debt you are working to repay, it does require some juggling of your finances and setting your priorities straight. First, make sure you have an emergency fund established that can help if an emergency or other unexpected expense pops up. Next, prioritize how aggressively you want to pay down your debt versus saving for your down payment and closing costs. You may need to cut back on certain expenses or earn extra income to balance it all, but these sacrifices can help you attain your goals more quickly!

Home Buying Myth #3: You need perfect credit to buy a house

If your credit score is over 740, congratulations! Your strong score will likely help you get one of the best rates. Additionally you will typically have an easier time getting approved for a home loan. There are other factors beyond just your credit score, but it does play a big role.

However, if your credit is less than perfect, don’t succumb to this home buying myth – there are still options! Conventional lenders will have different requirements but generally you’ll need your score to be at least 620. If your score falls below that, you may still qualify for an FHA loan.

Understanding and working on your credit score can help you qualify for a better rate when the time comes. Check out this post about How Student Loans can Affect Your Credit. There’s an explanation of the different factors that make up your credit score as well as some advice on how to avoid hurting your credit score.

Home Buying Myth #4: You can Borrow Money for your Down Payment

Several individuals have recently asked me about borrowing money to use for a down payment. It may seem like a good idea to borrow money from family or take out a personal loan to use for the down payment, however this makes you a much riskier borrower. It is also unlikely a lender will consider letting you use borrowed funds for a down payment.

Borrowing money will increase your DTI (debt to income ratio). It may also exceed a lender’s limits (remember the 28/36 rule discussed in Home Buying Myth #2).

If your family wants to help you make your down payment, they can gift it to you. You may need to provide verification that the money you received is a gift and you do not need to repay it.

Home Buying Myth #5: The Down Payment is the only money you need to have saved

We have talked a lot about the down payment, however, that’s not the only money you’ll need to have saved when you purchase a home. Closing costs range typically from 2%-5% of your home’s purchase price.

Closing costs include all sorts of expenses associated with buying a home. Those costs include services like home appraisal, title search, credit bureau, flood certification, recording and state fees, and lender fees (such as origination, application fee, or a processing fee). Also, front loading your escrow account which will pay out to your homeowner’s insurance and property taxes.

At FFCCU, mortgage loan experts work WITH you to help you find a lending solution that meets your needs. As a local Ohio mortgage lender they offer you some of the best rates possible. From conventional loans to FHA, USDA, and VA loans, FFCCU has a mortgage option that’s right for you.

Additionally, you’ll want to keep your emergency fund at a healthy level. All sorts of little expenses can pop up with a new home and you don’t want to be caught off guard with an expense you can’t afford.

As always, don’t hesitate to contact me if you have questions about this or any other financial topic.

Nichole M. Coyle,
CERTIFIED FINANCIAL PLANNER^TM
20333 Emerald Pkwy, Cleveland, OH 44135
216.621.4644 x1607

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