Buying and financing a new home can be a daunting task and many of us turn to friends and family for advice. But the only experts in the mortgage field….are the experts in the mortgage field! Friends and family might not be the experts they think they are. The mortgage guidelines and interest rates are changing so frequently that unless someone is in the mortgage field as a full-time job, you should only take advice from a mortgage professional.
So being a mortgage professional I want to outline the most common myths about mortgage lending, so you can avoid being misinformed.
Myth No. 1: The lowest price is the best value.
The lowest price is not the best value. I understand that it’s hard to pay $5 for a cheeseburger when you can get one for $4. But shouldn’t we ask questions about what type of meat is being used, if the bun is gluten-free, when that cheeseburger was prepared and if it has been sitting under a heat lamp, or if different types of cheese are available?
In other words, aren’t execution, and experience, and a lot of other metrics and variables just as important as the price? That’s just as true when you’re shopping for a mortgage as it is when you’re choosing your lunch. Why do we only measure things by price?
Myth No. 2: A realtor is the best person to assess the value of a home.
The best person to assess the value of a home is you…the consumer! Just like people say that we need to be responsible for and take control of their own health and not to blindly believe whatever our doctor tells us; the same thing applies in real estate. You can certainly enlist the opinion of a realtor, but that is only one step in determining the value of a home.
Whenever I look at a home for myself I take hours to do the long hand math. I analyze very recent and very comparable sales that are geographically close to the subject property, and make value adjustments up or down for square footage, level of finish, bedroom count, bathroom count, lot size, lot utility, proximity to a desirable feature or area like a lake, river or park, and come up with my own best guesstimate.
You can even consider paying an appraiser to appraise a home before making an offer. Unfortunately, that appraisal could not be used for a mortgage if you end up going to contract on the house, but it would be good peace of mind.
Myth No. 3: The “average interest rates” I see apply to me.
I get a lot of excited questions based on information people see on the latest “average interest rate” news. This data is usually published weekly or monthly by the media, so it is a regular source of misleading data.
The average interest rate is a compilation of a lot of different interest rate quotes and variables that do not apply to everyone’s exact situation. The average interest rate is a national average figure with interest rate quotes from across the country that may not apply locally, only for loans up to $424,100, and many times also includes interest rate quotes with points. But most consumers do loans with 0 points. Hence, the “average interest rate” you see online, on TV or in the newspaper may look artificially low.
Myth No. 4: You should not borrow against your 401(k) or other retirement account for a down payment.
Is it a good idea to borrow against your 401(k) to help get the down payment to buy a home? It is best to ask an accountant or financial advisor. The interest you pay on the loan is not an issue; since you are borrowing from yourself you would simply be paying interest back to yourself.
One downside to borrowing against your 401(k) is that you are borrowing pre-tax dollars and paying the loan back with after-tax dollars. Hence, although the interest cost is meaningless since you are paying interest to yourself, there is a cost since you are taking out gross dollars and paying them back with net dollars.
Another downside is that you lose the value of compound growth over time on the money you borrow from the account.
Myth No. 5: It is best to take the lender referral from your realtor.
Just as in myth #2, it is best to do your own homework and make your own decision. While realtors typically refer mortgage lenders they think are good, they are also referring lenders that they personally like. And that relationship can cloud judgment and cost you in poor execution or even missing out on better terms.
Over the last three decades that I’ve been in the mortgage business, I’ve come to the conclusion that realtor-lender relationships are more often based on something other than expertise and industry knowledge. Hint: it has to do with doughnuts, drinks and dinners.
Myth No. 6: You have to have a 20% down payment.
You do not need a 20% down payment to buy a home. Most loans do require that at least part of the down payment come from your own hard earned savings, but you can get a Conventional loan with 3% down, 5% down, 10% down or 15% down. You can get an FHA loan with 3.5% down, and if you are a veteran or actively in the military you can get a 0% down VA loan.
You can do a conventional loan with less than 20% down.
A 20% down payment is ideal because you’d then avoid private mortgage insurance (PMI). But as mentioned above there are other ways to avoid PMI. And, PMI can be dropped at some point.
PMI is a necessary evil to avoid waiting to save up a 20% down payment. The problem with waiting for a higher down payment is that interest-rates may be higher if you wait and property values may be higher. Hence, you may think you are saving on the mortgage insurance by waiting for 20% down, but it may be costing you far more elsewhere. Saving $5,000 in PMI is great, but not if you have to wait 2 years to save up 20% down and you end up paying $25,000 more for the house you want today!
Myth No. 7: A mortgage lender pulling my credit report will reduce my credit score.
Credit scoring allows for the fact that mortgage lenders will be checking your credit score to help you get pre-qualified for a mortgage. Hence, a mortgage lender inquiry into your credit report will not affect your credit score for thirty days. You can apply for a loan and compare offers all while your credit score shows no effect whatsoever from the applications.
Myth No. 8: If an appraisal comes in low on the home that I am buying the deal will fall apart.
When a homebuyer is getting a mortgage to buy a new home everyone seems to be on pins and needles waiting on the appraisal. When the appraisal does come in, if the appraised value is below the contract price the deal is not dead. With a low appraisal you can do one of the following:
- Renegotiate the sales price down to the appraised value
- Pay the difference in cash between the contract price and the appraisal
- The buyer and seller can split the difference
- If you have an appraisal contingency you can void the contract
Myth No. 9: You can pull your own credit score.
There are numerous iterations of credit scoring models. The credit scores that you can get for free from your credit card company or free credit score websites typically use an “educational” credit score that may be higher than the credit score mortgage lenders will see.
Now that we’ve cleared up a few myths, get a rate.