When it comes to taking a big financial step like applying for a mortgage, there are plenty of reasons why you might second-guess making the leap. After all, buying a house is likely one of the largest purchases you will make in your lifetime. And while it is prudent to give such a significant decision careful consideration, it is important to make sure misconceptions aren’t leading you astray.
Read on to see if any these mortgage myths are keeping you from applying.
MYTH: It’s cheaper to rent
THE TRUTH: While in some cases it is true that renting can be cheaper than buying when comparing monthly mortgage payments and monthly rent payments, a better question to consider is which option makes the most financial sense over time based on your particular situation. Rather than look solely at the monthly dollar-for-dollar difference, it helps to consider your breakeven point, which is the amount of time after which purchasing a home would be more cost effective than renting.
For instance, according to research from Zillow, the breakeven horizon for the Urban Honolulu, HI, Metro area is 5.7 years. That means that if you plan to live in a particular home in that area for less than 5.7 years, it may be better for you to rent. Compare that to the Dallas-Fort Worth, TX, Metro area, where the breakeven horizon is 1.2 years, meaning if you plan to stay put for a little over a year, buying may make more sense.
Check out our Buy vs. Rent Calculator to get a better idea of which option is best for you.
MYTH: You need to put 20% down
THE TRUTH: It is true that the larger your down payment, the smaller your monthly mortgage payment is likely to be and you will ultimately pay less interest over the life of your loan. And if you do put down less than 20% on a conventional loan, you will have to pay mortgage insurance. However, it is not the only option.
Loans backed by the Federal Housing Administration (FHA) only require 3.5% down and the funds can even be gifted by your family or employer. Some states have bond programs that provide down payment assistance in the form of a second mortgage or in some cases, a non-repayable grant. Further, if you qualify for a VA loan or USDA loan, you may not need a down payment at all.
A licensed mortgage professional can help determine your eligibility for specific loan programs.
MYTH: You have too much student loan debt to qualify
THE TRUTH: Simply having student loan debt does not automatically render you ineligible to receive a mortgage. However, the weight it carries in your debt-to-income (DTI) ratio does have an impact. Of course other factors including your credit score and employment history will also be considered.
Earlier this year, the Department of Housing and Urban Development (HUD) eased some of the guidelines for FHA loans, specifically related to the consideration of student loan debt. Previously, if you had loans in deferral, lenders had to account for monthly payments of 2% of the student loan balance even if you were not currently making payments. Under the new rule, lenders only have to include the greater of either 1% of the student loan balance or the payment amount actually being made. This would mean the difference between $600 and $300 per month on an outstanding balance of $30,000.
Still, to qualify for an FHA loan, your back-end DTI ratio must not exceed 43%.
Contact a Castle & Cooke Mortgage loan originator today for a no-obligation prequalification.
MYTH: You won’t qualify if you have a past bankruptcy
THE TRUTH: Past bankruptcy will not necessarily prevent you from getting approved for a mortgage. But depending on the type of loan you are pursuing, there are different waiting periods you will have to satisfy.
If you have filed for a Chapter 7 bankruptcy, there must be four years between the discharge date and the date of your application for a conventional loan, three years from the date of discharge for a USDA loan or two years from the date of discharge for either an FHA or VA loan.
If you have filed for Chapter 13 bankruptcy, you must be two years from the date of discharge or four years from the date of dismissal for a conventional loan. To qualify for a USDA loan, one year must have elapsed since the completion of payments with a satisfactory payment history. For an FHA loan, one year of payout must have passed and you must receive court approval. And for VA loans, you may be eligible upon completion of the bankruptcy with a satisfactory payment history.
If you have experienced multiple bankruptcies within the last seven years, you must wait five years from the date of discharge of the most recent occurrence.
Castle & Cooke Mortgage, LLC® (NMLS #1251)is a leading independent mortgage lender headquartered in Salt Lake City, Utah, with locations across the United States.
Restrictions may apply. Not all who apply will qualify. Program qualifications & offerings are subject to change at any time.