Buying a home is a big decision for several reasons. For one, you’ll most likely have to live with the home for years to come. It’s also a significant investment, and for most people, the biggest single purchase they will ever make. That’s why most people spend a lot of time and energy searching for the perfect house to call home. Unfortunately, they often spend far less time and effort shopping for the right mortgage. And to compound that problem, there’s a bunch of myths and misunderstandings surrounding mortgages. Here’s what you need to know.
Pre-Qualified Vs. Pre-Approved
Many homebuyers are under the assumption that being pre-qualified is the same as being pre-approved. The two terms “feel” like they mean the same thing. However, they are as different as jeans and a t-shirt are from a bow tie and tuxedo. Pre-qualifying for a mortgage is largely an informal process. You provide your information to a mortgage lender and they estimate how much you may qualify for. Pre-qualification is all very casual, like the jeans and t-shirt.
Pre-approval, on the other hand, is the more formal stuff. The lender has checked your credit and verified your income and assets. They then make a commitment to give you a mortgage up to the pre-approved amount. Final approval depends on whether the home’s appraisal value is at least the purchase price. Because pre-approval is a much more formal process, you can show up at the negotiating table dressed to impress and with a decided advantage over other (more casual) buyers.
Principal and Interest Are All That Matter
Buyers often believe that only their borrowing amount and the interest rate will determine their monthly mortgage payments. Many buyers, especially first-time buyers, get into trouble this way. These buyers often base their decisions on basic mortgage calculators to see how much they can afford.
In reality, monthly mortgage payments include much more than those two amounts. The amount also includes taxes and insurance, which can add several hundred dollars to those monthly payments. It’s best to find a robust mortgage calculator (like SmartAsset’s!) that includes these expenses as well.
All Mortgages Are the Same
This myth is based on the belief that, for example, a $150,000 mortgage with a 5% interest rate is the same across all lenders. This could not be further from the truth. Closing costs and other fees vary from one mortgage lender to another by as much as $5,000 on a $150,000 loan. That’s money that the buyer will have to come up with at closing or roll into the mortgage, which increases the monthly payments.
A Large Down Payment Is Required
Many renters look at their local housing market and never consider buying because they think they need a 10% or 20% down payment in order to get a mortgage. A bigger down payment does mean lower monthly payments. But not having $15,000 or $30,000 in cash for a down payment isn’t a deal breaker to getting a mortgage. FHA-backed loans can require a down payment as low as 3.5% of the home’s price. On a $150,000 home, that translates to just $5,250. This small amount offers a much more doable option for most buyers.
If you have good credit, it’s important to explore your mortgage options. The number and scope of programs can differ depending on what state you live in and whether you’re a veteran or not. But there are lots of options that can get you into your dream home for a lot less than you thought.
Tips for Buying a Home
- Make sure your credit score is in good shape. With a high credit score, you can get lower mortgage rates, which translates to lower monthly mortgage payments.
- Talk to a financial advisor about how buying a home will factor into your larger financial plan. You want to ensure you can purchase a home without sacrificing your other financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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