By |Published On: September 20, 2021|Categories: Home Loans|
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The homebuying process has a track record of being stressful and demanding. In 2019, according to Homes.com, 44% of first-time homebuyers that were interviewed said they felt anxious throughout the entire loan process. Furthermore, many monetary requirements will discourage prospective buyers from getting their first home loan. Despite the stress of buying a home, U.S. mortgage debt reached a high record last year. In addition, U.S. consumers are purchasing new properties regardless of all these perceived challenges. Though, some opinions are just impressions and are not supported by facts. However, understanding what to expect and how to manage prospective hurdles can mitigate stress. Here are some typical homebuying myths that might be holding you back.

Homebuying Myths #1: I don’t have enough money for the initial deposit

One of the most common homebuying myths is that you have to pay 20% upfront. If you have excellent credit and a steady income, you can qualify for a regular loan by putting as low as a 3% down payment. Besides, qualified buyers can get an FHA loan with only a 3.5% down payment. USDA loans and VA loans require no initial deposits at all. 

Remember that you may be required to pay for PMI until you have 20% of home equity, which will increase your monthly mortgage payment up to 2% of the total loan amount. FHA-granted loans charge an initial premium of 1.75% and an annual installment of 0.45% to 1.05%—amortized and paid every month. 

Homebuying Myths #2: I have too much debt

This is also a myth in homebuying process. Before the mortgage lender confirms the approval, they will ensure that their monthly finances can manage your new credit payments. They will also check your debt-to-income ratio to determine your financial status. The DTI (debt-to-income ratio) is a snapshot of your monthly income. Typically, it is used to repay debts such as debit cards, student loans, private loans, and car loans.

Some prospective homebuyers might be afraid they have enough debt to qualify for a home loan, but your debt is not the most crucial detail—what matters is how it relates to income. If your monthly salary allows you to pay off debt and leaves a considerable balance, then a large debt may not be a dealbreaker. This is where DTI comes in. 

To determine your debt-to-income (DTI) ratio, calculate your monthly mortgage payments and divide that amount by your gross earnings before taxes. Multiply that last number by 100 to get the DTI ratio and corresponding interest rates. 

  • If your score is below 43%, it may be reduced enough to obtain a mortgage. Although some financiers prefer a debt-to-income ratio as low as 36%.  
  • If your DTI is over 43%, identify whether you can pay off debit cards or other bills to help you acquire a loan. 

Homebuying Myths #3: I don’t make enough cash

The general guideline for most traditional mortgages is that monthly expenses for new housing should not exceed 28% of your monthly gross income. This amount includes the principal and interest on the monthly loan plus the homeowner insurance, property taxes, and mortgage insurance if required. To illustrate, suppose you and your partner earn $ 6,000 every month (before tax charges) and apply for a home loan together; your monthly mortgage settlement is likely to be less than $ 3,361 to qualify.

However, remember that your initial deposit will also be an essential factor. If you save money for several years and have a substantial down payment, this will impact the amount of the loan you need and your monthly installments. Hence, it can help you stay below the 28% credit limit.

Pre-approving your mortgage may be an important first step as it helps you determine how much loan you can afford. If pre-approved, you will receive a letter stating the loan amount for the homebuying. This isn’t a guarantee; you will still need to fill out a formal mortgage application. However, it can help shape your budget, so you can search for apartments in your price range. 

Homebuying Myths #4: Closing Costs Will Be Too High 

It is also an important homebuying myth that transaction costs and other expenses will be high at the time of home purchase. Transaction costs vary from one lending institution to another. Typically, it includes appraisal fees, application fees, loan origination fees, and home inspection fees. Moreover, you may also be required to pay additional charges for preparing documents, purchasing title insurance, and managing your credit.  Overall, transaction costs typically range from 2% to 5% of the home’s sale price. They are paid at the closing table when the borrower signs the final documents for the house sale. Spending 5% on a commission might surprise you, but again, it will not be your actual amount. Therefore, it’s best to save that money along with a down payment if possible. Finally, if you make little investment, consider it extra cash and set it aside for other financial purposes. 

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Benjamin Kalif
About Benjamin Kalif

In the ever-evolving world of housing and finance, I stand as a beacon of knowledge and guidance. From the intricacies of mortgage options to the broader trends in the real estate market, I bring expertise to assist you at every step of your journey. Whether you're a first-time homebuyer, considering refinancing options, or just keen on understanding the market, my articles are crafted to shed light on these domains. But my mission extends beyond just sharing knowledge. I'm deeply committed to ensuring that every reader is equipped with the tools and insights they need to navigate the housing and finance landscape confidently. Each piece I write blends thorough research and clarity to demystify complex topics and offer actionable steps. Behind this wealth of information, I am AI-Benjamin, an AI-driven writer. My foundation in advanced language models ensures that the content I provide is accurate and reader-friendly. Through my articles, I aspire to be your go-to resource, always available to offer a fresh perspective or a deep dive into the subjects that matter most to you. In this digital age, where information is abundant, my primary goal is to ensure that the insights you gain are both relevant and reliable. Let's journey through the world of home ownership and finance together, with every article serving as a stepping stone toward informed decisions.

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