5 Myths About Home Mortgages Busted

As a mortgage loan officer, I've had the privilege of helping countless individuals and families turn their homeownership dreams into reality. Along the way, I've encountered several misconceptions that often hold people back from pursuing their goal of owning a home.

Let's bust five common myths about home mortgages and empower you with the accurate information you need to make informed decisions.

Myth 1: You Need 20% for a Down Payment

One of the most persistent myths in the world of homebuying is the belief that you need to save up a hefty 20% down payment to purchase a home. While a larger down payment can offer certain benefits, it's far from a requirement. The idea behind a 20% down payment is to secure a more favorable mortgage loan, typically with lower interest rates and no private mortgage insurance (PMI) requirement.

Many lenders offer mortgage options with much lower down payment requirements, some as low as 3% to 5% of the home's purchase price, or even no money down in certain situations. Some loan programs, like FHA (Federal Housing Administration), may require as little as 3.5% down. VA (Veterans Affairs) loans may even allow eligible veterans and active-duty service members to buy a home with no down payment. These programs make homeownership more accessible, especially for first-time buyers who might not have substantial savings.

It's important to note that putting down less than 20% may lead to higher monthly mortgage payments and additional costs in the form of PMI, which protects the lender in case you default on the loan. So, while a 20% down payment isn't mandatory, it's often recommended to help you secure a better financing deal. However, the right down payment amount ultimately depends on your financial situation, goals, and available mortgage options.

It's crucial to explore different loan options and discuss your financial situation with a mortgage professional to find the best fit for your circumstances.

Myth 2: You Must be a U.S. Resident for Two Years to Apply for a Mortgage

The misconception that you need to be a permanent U.S. resident or have lived in the country for a specific duration before buying a home is not entirely accurate. Lenders typically want to see a solid legal residency or citizenship history to assess your financial stability and creditworthiness. While two years of residence might be a guideline for some lenders, it's not an absolute rule.

While citizenship and residency can impact certain loan programs, there are mortgage options available for non-citizens and those who haven't lived in the U.S. for an extended period.

These options might have different eligibility criteria, but they can provide a pathway to homeownership for a diverse range of individuals. Consulting a knowledgeable mortgage specialist can help you navigate these options and find a suitable solution.

Myth 3: Local Banks are the Same as Community Banks

In today's interconnected world, the concept of a "local" bank has evolved. Many financial institutions, even those without a physical branch nearby, offer online and remote services that provide what they would call a seamless experience.

Let's clear up the difference between local banks and community banks

The distinction between a bank with in-house underwriting and decision-making processes and one without is as clear-cut as it seems. The expected turnaround time is much faster when the underwriter and loan decision-makers work together – which is often the case at community banks. It can often make a substantial difference when you need closing to happen in a constrained time period.

In general, local banks are essentially banks that operate within a specific geographical area, like a city or a region. They could be large, regional institutions with multiple branches but only serve one local area. So, you'll see their branches around town, and they cater to the local community, but they might not have that small, hometown feel.

Community banks are like the neighborhood hubs of the banking world. They're typically smaller and serve a specific local community or a group of communities. They're all about that personal touch, knowing your name when you walk in, and understanding the unique needs of the people they serve. They often focus on providing local businesses and residents with banking services, and they may even reinvest in the community through loans and philanthropic efforts.

So, in a nutshell, while both local and community banks have a local focus, community banks tend to be smaller and have a more pronounced community-oriented approach. It's all about finding the right fit for your banking needs and the level of personalized service you're looking for.

Myth 4: Applying for a Mortgage Will Hurt Your Credit

The fear of a credit score drop often holds potential homebuyers back from applying for a mortgage. While it's true that a hard inquiry is typically generated when you apply for a mortgage, the impact on your credit score is generally modest and short-lived.

Multiple inquiries made within a short timeframe for the purpose of obtaining a mortgage are often treated as a single inquiry by credit scoring models. Additionally, the potential benefits of securing a mortgage – such as building equity and homeownership – can far outweigh any temporary dip in your credit score.

Just be sure to continue managing your finances wisely during the home-buying process to help mitigate any potential negative effects on your credit.

Myth 5: All Mortgage Pre-approvals are Created Equal

Pre-approval is a crucial step in the home-buying process, but not all pre-approvals are created equal. Some pre-approvals are based on limited information and might not hold up when it comes to final loan approval.

It's important to work with a reputable lender who conducts a thorough review of your financial situation before providing a pre-approval. This involves verifying your income, assets, credit history and other factors that influence your eligibility for a mortgage. A robust pre-approval gives you a clearer picture of your purchasing power and helps you shop for homes confidently.

Navigating the world of home mortgages can be daunting, especially when faced with pervasive myths that can influence your decisions. Understanding the truth behind these myths can empower you to make informed choices and confidently pursue your homeownership dreams.

Remember that mortgage options are diverse, and lenders are equipped with tools and resources to cater to various financial situations. In my case, that includes a trilingual background – I speak Russian, Ukrainian and English all fluently. If one of these is your native language, I’m more than happy to explain the home mortgage process in terms you’ll easily understand.

By partnering with a knowledgeable mortgage professional and conducting thorough research, you can take meaningful steps towards achieving your goal of owning a home.

For even more information, check out our article explaining the entire mortgage process.

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.