Whether buying a house is a “future you” feat or you’re already actively shopping the local housing market, home-buying is a big deal. It's a decision you want to get right. Here are seven of the most common myths and misconceptions regarding house buying. Take a peek below before you start signing any important paperwork.
1. You always have to come up with at least 20% for the down payment when buying a house.
Twenty percent is a fairly standard down payment requirement for many mortgages these days, and the more you can put down on a home, the better chance you have of qualifying for the loan. It also bumps up your odds of scoring better interest rates and saving yourself a heap of money over the life of the loan. But if you stop and do the math, twenty percent (or more) of the price of a home in today’s market… well let’s just say it’s a big number.
FHA loans, while they do have other pros and cons to consider, require as little as 3.5% down. If you’re active duty military or buying rurally, you might be a match for either VA or USDA-backed loans, which currently require no down payments.
So why is the 20% myth so widely spread? Here’s the downside of putting down less than 20%:
With less than 20% down on a conventional loan, you’ll pay Private Mortgage Insurance (PMI) until the PMI is terminated, canceled, or you pay your mortgage down to 78% of the original purchase price.
When putting down less than 10% on an FHA loan, you’ll pay a required Mortgage Insurance Premium (MIP) for the life of the loan or until the loan is paid off through a refinance or sale.
- Both of these (PMI and MIP) are usually added to your monthly mortgage payment and these costs can be significant (ranging from as little as .1% to more than 1% of the loan amount annually, depending on your down payment, credit score, and loan type). You can find more detail on these costs here.
2. The down payment is the only cash you need upfront.
Don’t sink all your cash into your down payment! You may also need to cover closing costs out of pocket, which usually includes an initial escrow payment, origination fees, recording fees, title fees, and more. You’ll also likely have moving costs and need to set up an ongoing fund for home improvement and repair.
3. You should find a house before applying for a loan.
Depending on current market conditions, buying a house can become a very intense process. As you race to put in your offer before other buyers and then come up against counter-offers, you never know what will happen. Getting a prequalification letter before house shopping will do two helpful things for you:
- It gives you the house price range for which you are qualified.
- It enables you to put money down and sign a buy/sell agreement with confidence.
You could find the house first and secure financing after, but you’re risking losing out to another buyer who is prepared with a home loan pre-approval and able to make an offer before you.
4. You need perfect credit to buy a house.
An impressive credit score will help you get the lowest interest rates, but spotless credit history isn't necessary for qualification. Many lenders will require a credit score of at least 640 for a borrower to qualify for a conventional or USDA mortgage loan. However, credit unions tend to be more flexible in this area because of their tendency to work with the member as a person, not as a number.
Speak with a knowledgeable credit union mortgage lender or local credit counselor for advice on improving your credit and to determine the best type of home loan for you.
5. You’ll get a big tax break when you buy a house.
People often think that if they take out a large mortgage, they’ll reap enough benefits from the tax deductions to make it worth it. However, you need to keep in mind that there are limits to how much the IRS will allow you to deduct. These are based on whether you’re filing as an individual, a married couple filing jointing, or a head of household.
This limit is currently set at interest on qualifying mortgages with a principal balance of up to $750,000. To really benefit from tax deductions on mortgage interest, you’d have to pay more than the standard deduction annually. Speak with an experienced tax accountant to determine the amount you would be able to deduct, and whether it’s worth it to itemize your return for mortgage interest purposes.
6. Fixer-uppers cost less.
Even if you are experienced enough to handle most repairs yourself, fixer-uppers can cost much more than you anticipate. A low initial home cost may be tempting, but pretend that the upper estimate on repairs and updates needed is factored into the cost. Is the house livable before these repairs/updates are finished? How will you finance those expenses?
A house may only cost you $85,000 to buy but could take over $100,000 to renovate before it’s in livable condition. Be sure you know exactly what you're getting yourself into by following along with the home inspector before you buy, and read through these fixer-upper pros and cons for more info.
7. Buying a house is always a good investment.
Yes, it’s true that real estate values tend to increase over time. It’s often a low-risk, low-cost investment option, but it’s not the right choice for everyone. For example, if you’re on a temporary job assignment for 18 months, buying a house is probably not a good investment for you!
Factor in how long it takes to close on a home loan, with the number of monthly payments it will take to make up the costs & fees of your mortgage loan, and 18 months probably isn’t enough time to make it worth your while. However, if that job assignment were to be extended another five years, it may now be a good investment for you to buy a home.
Ready to buy?
The local housing market also impacts whether buying a home at a specific time is a good investment. Speak with an experienced local real estate agent to get their perspective on this factor.
If you do decide to buy, do your research and make sure you’re getting a fair price for the house and the loan. Plan to remain in the home for a minimum of 2-3 years (although more conservative estimates say 5 years is a better minimum to hold to.)
CCCU is here to help find a mortgage solution to fit your needs. Apply online or visit any of our branch locations, contact our mortgage team, or give us a call at 503.963.6666.