Busting the Top 10 Myths about homebuying

Buying a home is one of the most important and expensive decisions you’ll ever make. For that reason alone, you need to use the best, most accurate information you can find when making it. Unfortunately, there’s a lot of bad information out there, often repeated by people with the best of intentions.

This incorrect information and uninformed opinions have developed into widely held myths around buying a home that need to be corrected. Once you find out the real story behind these myths, you’ll be set up for success in your quest to buy a home.

1.

20% down payment is necessary

The idea of paying 20% of the purchase price upfront as a down payment, and then financing the rest of the price with a mortgage, goes all the way back to the end of the Great Depression.

Why 20%? No one seems to know or remember why, strangely enough.

However, 20% became the norm for decades from the ‘50s on, but it’s just not the case anymore. The truth is that in 2019, the average down payment for a first-time homebuyer was 6% of the purchase price and 16% for a repeat homebuyer.

Today, you may be able to get a mortgage on a home with options requiring as little as a 3% down payment, if you qualify. It’s important to note, though, that if you put less then 20% down, you’ll likely be required to pay for private mortgage insurance (PMI). This is a premium that you’ll pay each month to your lender to mitigate the risk they take on by accepting less than 20% in down payment.

If you’re like most people and are unsure if you’ll be able to pay 20% of the purchase price upfront, talk to your lender about down payment assistance programs that may be available.

2.

It’s cheaper to rent than own

When looking at your monthly expenses, it may seem like renting is cheaper than buying. Taking into account how much you have to pay in down payment, on top of your monthly mortgage payment, your monthly rent check probably looks small in comparison.

But when you look at all of the benefits of owning a home, you’ll see that owning your home makes much more financial sense. First off, instead of giving your rent money to your landlord, you are investing it into your home’s equity. And with mortgage rates near all-time lows, your monthly mortgage payment may be lower than what you were expecting and comparable to your monthly rent payment.

Typically, if you plan on living in the same area for more than a couple of years, it’s smarter to buy your home. Doing a costs-benefit analysis can help you see why owning makes so much sense.

3.

It’s cheaper to buy a fixer-upper

If you’ve seen any of the popular home improvement shows, you may have an idea that buying a home that needs a lot of work is a smarter, cheaper way to your dream home. But you’ve also probably heard horror stories of old homes that turn into a money pit, constantly surprising the owners with expensive issues that need to be addressed.

The truth is, buying a fixer-upper may be a cheaper way to become a homeowner, but renovating it can often push your overall price tag into the same range as buying a move-in-ready home.

4.

You need to be debt-free first

A common concern for Millennial first-time homebuyers is that they have more student debt than previous generations of homebuyers. They’re worried that these large amounts of unpaid loans will make them unable to qualify for a mortgage, and it keeps many from buying their first home. But large amounts of debt don’t necessarily disqualify anyone from buying a home.

The good news is that lenders don’t look specifically at the amount of debt you have, but rather at your ability to afford your home payments in your monthly budget. That’s where your debt-to-income, or DTI, ratio comes in. Your DTI ratio is the percentage of your monthly gross income that you spend paying down recurring debt.

A lender looks at the amount of debt you are obligated to pay off and compares it to the amount of money you earn when deciding to finance your loan. So long as you are keeping your debt in line with your income—and even better, paying it off—your student loan, car loan or any other debt, by itself, won’t keep you from buying a home.

5.

All lenders are the same

Many homebuyers compare rates when choosing which lender to work with, but that’s not the only consideration you should look at. There are many differences between lenders beyond the rate they are willing to quote you, and these differences could significantly affect your homebuying experience.

• You may work with a loan officer, a mortgage broker or get a loan entirely online. Learn more about how these roles are different and figure out which would work best for you.
• Your lender’s technology platform (or lack thereof) can make a huge difference in the experience of financing your home. The most technologically-advanced lenders can help simplify the process of applying, uploading documentation and even closing your loan.

6.

Spring is the best time to buy

Traditionally, spring has been known as the “Spring Selling Season” in real estate. Homeowners put their homes on the market in spring, so that they can close a sale and make their own move in the summer, and be in their new home in time for school to start in the fall.

But the effect of this is that spring is also when more buyers are in the market, driving up home prices. So, buying outside of the traditional hot season can work to your advantage.

Also, during the pandemic the traditional hot selling times have been completely upended. After a dip in demand starting in the spring of 2020 when the first lockdown orders were put in place, demand has surged and stayed high pretty consistently through all four seasons of 2021 and into 2022. Now, inflation concerns, along with other underlying issues, have suppressed homebuying throughout most of 2022.

7.

You should find a home before applying for a loan

Some homebuyers start by just browsing their area, getting an idea of what’s available and what they’re looking for. Almost inevitably, these shoppers find a home that they fall in love with and want to make an offer. What comes next is predictably disappointing:

• They lose out on the home as they have to spend time getting their financing in place.
• They overestimate how much they can afford, and their lender tells them that the home is out of their price range.

That’s why everyone shopping for a home, no matter how serious they are, should get pre-approved at the beginning of the process. This will allow you to put a serious offer in as soon as you find the home you want and will help set you apart from other bidders.

8.

30-year fixed mortgage is the only way to go

The most popular length of mortgage is for 30 years , with over 80% of homes financed at that length. But that is not the only length of mortgage out there. A 15-year term mortgage has a few advantages over the 30-year team, which is why it is the second most popular mortgage term.

• Generally, it has a lower interest rate
• You’ll build equity in your home faster
• You’ll pay off your mortgage in half the time

Your monthly payment will be higher with a 15-year mortgage, but you’ll pay less in interest over the life of the loan—usually a lot less.

9.

You should always go with the lowest interest rate

As we mentioned in #5 above, the lowest rate isn’t the be-all and end-all when it comes to choosing which loan to go with. Beyond the differences in types of lenders, there are also fees associated with the loan that don’t get included in the interest rate, and should factor into your decision.

A lender could offer a low interest rate, then charge higher fees that don’t show up in the rate they quote you. That’s why you should take a look at the annual percentage rate (APR) of your loan. APR reflects the actual cost of getting a loan and includes things like closing costs, origination fees, PMI and more.

Also, you may be able to pay down the interest rate by purchasing points from your lender. Points are fees borrowers may pay to the lender. One point is equal to one percent of the principal amount of a home loan. Speak to your lender about the possibility of purchasing points to lower your interest rate.

10.

Once your offer is accepted, the deal is done

This myth is often the most surprising, and the most stressful, when it turns out to be busted. Getting an offer accepted is a great reason to celebrate, but it doesn’t represent the end of the process, or even the end of the negotiations.

After your offer is accepted, you’ll find yourself in one of two different statuses: Contingent or Pending.

Contingent means the seller has accepted the buyer’s offer with requirements for the sale to proceed. If one of the parties fails to check these boxes, the other party can back out of the deal. Common contingencies include:

• Home inspection – which could uncover issues with the house that may need to be repaired, and require negotiations with the seller over who should pay for them
• Appraisal – which could tell your lender that the purchase price is different than the value of the property as assigned by an independent appraiser, and can affect your financing
• Financing – which gives the buyer time to obtain a loan to finance the purchase, which is different than a preapproval
• Clear title – which ensures that the seller can deliver a title that is free of liens or any other problems

Pending means the seller has accepted the buyer’s offer, and the contingencies have been met. However, the transaction has not been completed and the offer can hit obstacles that can reopen the negotiations and put the house back on the market.

Keep in mind that until you close on your home, nothing is set in stone. There are still many parts of the process that need to happen, and those can reopen a deal you thought was closed. Prepare yourself, because things will come up.