If you’re a first-time homebuyer, you may feel overwhelmed by the wealth of information available on how to purchase a home. There are common myths surrounding the homebuying process, such as the need for a 20% down payment, the belief that renting is always cheaper than buying, and the misconception that you only need to save for a down payment.
In this article by Redfin, we debunk 11 of these myths to help you understand what truly matters when buying your first home, whether you’re considering properties in Nashville, TN or a condo in Chicago, IL.
Myth #1: A 20% Down Payment is Necessary
Contrary to popular belief, you don’t always need a 20% down payment to buy a home. Various loan programs allow for minimal or no down payment at all.
- FHA loans: Require as low as 3.5% down
- VA loans: Offer 0% down payment
- USDA loans: Also provide 0% down payment option
- Conventional loans: Typically require 3-5% down payment, depending on the lender
For conventional loans, it’s important to factor in private mortgage insurance (PMI) into your budget if your down payment is less than 20%.
There are also various down payment assistance programs available that can help reduce your down payment amount or cover closing costs.
Myth #2: Renting is Always Cheaper than Buying
The cost of renting versus buying a home can vary depending on several factors. In some areas, monthly rent may be equivalent to or higher than a mortgage payment. Additionally, buying a home can provide more stability and equity in the long term if you plan to stay in the same location for more than 5 years.
Using a rent vs buy calculator can help you estimate the financial differences between renting and buying in your area.
Myth #3: Saving for a Down Payment is Sufficient
Aside from saving for a down payment, it’s essential to consider other upfront costs such as closing costs, agent fees, inspections, and moving expenses.
- Closing costs: Typically range from 2-5% of the purchase price
- Agent fees: Can be around 1.5-3% of the purchase price
It’s important to factor these additional expenses into your budget when planning to buy a home.
>>Read: How Much Money Do I Need to Buy a House?
Myth #4: Student Loans Must Be Paid Off First
Paying off student loans before buying a home isn’t always necessary. Your debt-to-income ratio (DTI) plays a crucial role in determining your eligibility for a mortgage. If your DTI is below 36%, you may still be able to buy a home even with existing student debt.
Most lenders prefer a DTI of 36% or lower when approving a mortgage application. If your DTI exceeds this limit, it might be beneficial to pay off your student loans before pursuing homeownership.
Myth #5: Perfect Credit Score is Required
While a good credit score can enhance your loan options and terms, you don’t need a flawless credit history to buy a home. Different loan types have varying credit score requirements:
- Conventional loan: Typically requires a credit score of 620
- FHA loan: Minimum credit score of 580 (or 500 with a 10% down payment)
- VA loan: No specific credit score requirement, but a score of 620 is often preferred by lenders
- USDA loan: Credit scores between 620-640 are typically accepted
If your credit score isn’t ideal, collaborating with a lender can help you identify the best loan options and devise a strategy to enhance your credit over time.
Myth #6: High Interest Rates Render Buying Unfeasible
Even with higher interest rates, purchasing a home can still be a viable option if it aligns with your current financial situation. Interest rates fluctuate, but home prices and inventory also change over time.
If you discover the right home and are financially prepared, buying now can make sense. In the future, you can always consider mortgage refinancing if interest rates decline.
Myth #7: Mortgage Lenders Offer Identical Rates
Contrary to popular belief, mortgage lenders don’t all provide the same interest rates and terms. Each lender employs distinct criteria to determine rates, and even slight variations can have a significant impact over time. When comparing mortgage options, obtaining quotes from multiple lenders is advisable to find the most suitable one for your financial circumstances and homeownership objectives.
Myth #8: Pre-Approval Guarantees Loan Approval
While a mortgage pre-approval demonstrates your seriousness as a buyer, it doesn’t ensure automatic loan approval. Lenders retain the right to reject an application if circumstances change, such as variations in income, credit score, or the home’s appraised value.
Pre-approval marks an essential initial step, but it’s crucial to maintain financial prudence until the home purchase is finalized.
Myth #9: Real Estate Agents Are Dispensable
While it’s technically possible to buy a home without an agent, a skilled real estate agent can streamline the process and help you evade costly errors.
From identifying the ideal property to crafting a compelling offer, an adept real estate agent serves as your advocate throughout the entire journey. They possess local market expertise and can identify potential challenges early on, particularly beneficial for first-time buyers.
Myth #10: Home Inspections Are Discretionary
Regardless of whether you’re using a loan or cash to purchase the property, obtaining a home inspection is crucial. In most cases, mortgage lenders mandate a home inspection before finalizing the purchase.
Even if a lender doesn’t stipulate a home inspection, it’s unwise to forgo one. A licensed inspector can uncover potential issues or damages that could impact your ownership of the property. If significant problems are detected, you can negotiate with the seller for repairs, a price reduction, or opt out if you have an inspection contingency.
Myth #11: Listing Price is Non-Negotiable
The listing price serves as a starting point for negotiations. You have the opportunity to propose counteroffers, whether regarding the home’s price or requesting seller concessions. In a competitive market, you might need to exceed the listing price, but your agent can assist in making your offer stand out. In a slower market, price negotiation could be more flexible. Remember that market conditions, buyer interest, and other factors can influence the final purchase price.
Next Steps for First-Time Home Buyers
Don’t let homebuying misconceptions deter you from fulfilling your dream of owning a home. If you have lingering financial concerns or uncertainties about the homebuying process, consult a real estate agent, lender, or financial advisor to initiate your home buying journey. You might find that you’re more prepared to purchase a home than you initially thought.