Tips for shopping around for a mortgage -- even if you think you don't qualify.
Think you're not ready to unlock home ownership yet? That the financial hurdles are too high? You may be short-changing yourself. Many of the things renters believe about home-buying are myths.
Here's the real deal.
Myth: I Have to Put Down 20%. :(
Saving 20% of the price of a home in many places isn't just a challenge; it's a roadblock. And it's not a must-do. In fact, the median down payment for first-time buyers is 7%. How can you become part of the less-than-20 club?
- FHA Loans: The Federal Housing Association (FHA) is an old friend to first-time buyers and others who are ready to become homeowners with less than a 20% down payment. If you qualify, you may be able to get a loan with as little as 3.5% down.
- DownpaymentResource.com and NeighborWorks: Some local and state agencies sponsor down-payment assistance programs that help prospective home buyers in different ways. Follow the links to find out if any are available near you.
- VA, USDA, and Navy Federal Credit Union loans: Three government-related lenders offer mortgages with as little as zero down. The VA is for veterans and family members; the USDA is for buyers in qualifying locations (typically rural); and Navy Federal Credit Union is for the military, family members, and some government employees.
- Gift Funds: Sixteen percent of buyers ask friends or relatives to help jump-start their home ownership with a gift. Talk to your lender first, though. There may be limits to the amount of gifted funds they'll accept, and they may require your benefactor to sign some paperwork.
Myth: My Low Credit Score Means I Can't Buy a Home
So, your credit could use a tune-up. 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%.
- A higher down payment: On the off-chance you have enough cash on hand to put down more than 20%, the higher down payment can help those with lower credit scores be 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, the cosigner will be financially responsible (and their credit will also suffer).
- Check your credit report. Maybe your credit isn't that low after all. Order a copy of your report from all three reporting agencies (Equifax, TransUnion, and Experian). If you find inaccurate or old information, ask the agencies to correct it. (You can order a free report from each of the bureaus once a year at annualcreditreport.com.
Myth: I Can't Afford the Agent's Commission
Here's one you can immediately mark off your worry list. Typically, the commission is paid from the proceeds of the sale via the seller.
This is one of many reasons to contract with a buyer's agent. The seller's agent doesn't work for you, and you need a pro in your corner.
Myth: My Bank Will Give Me the Best Mortgage
There are a lot of positive things to say about working with your local bank, but assuming they'll give you the best mortgage is a mistake.
Banks are only one type of home-loan lender. Others include credit unions and mortgage companies. Mortgage rates aren't the same across the board, so contact several institutions to ensure you're getting the best price.
Or, if you prefer to let the lenders come to you, 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 you. So you'll want to shop around for a broker, just as you would for a lender.
Myth: I Was Pre-Approved. I Got The Loan!
Well . . . no. Don't order that couch from West Elm or pack away your tax documents just yet.
You don't get the loan until:
(a) The seller accepts your offer
(b) Your lender approves the loan (which you'll need those tax docs for)
(c) You sign the loan papers
Between (a) and (c), the lender will have the home appraised to ensure its value is in line with the purchase price, check your credit again, and ask you for more documents than you ever knew existed.
So what does "pre-approved" mean for a loan? It tells sellers you're eligible for a loan and shows them you're a serious, qualified buyer. This gives them confidence in your offer, increasing your chances of (a), (b), and (c) actually happening.
Myth: 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 for a loan, check the annual percentage rate (APR). It includes all loan costs, such as origination and processing fees that can vary widely from lender to lender, in addition to the interest rate.
One loan may have a lower interest rate, but the up-front fees cost more than you'd save in interest. The APR lets you compare apples to apples.
Before you sign the loan, your lender will give you a loan estimate, a line-by-line estimate of fees. You'll find the APR there. Use that rate to compare the loans you're considering.
How about that? You may be closer to home ownership than you thought. Happy house hunting!