Busting 5 Common Mortgage Myths
At UMCU, we’ve been offering a first-time homebuyer class for many years, and it’s always a joy to lead those sessions. The process of successfully purchasing your first home requires time and patience—starting with initial planning, saving for a down payment, selecting a real estate agent, and eventually securing a home mortgage that fits your life.
Common Mortgage Misconceptions
For most people, buying a home is the single largest financial transaction they will ever make. To help you feel more confident about the options available, we spend an abundance of time in our classes focused on the mortgage loan. Even with all the information available online, there is still a great deal of confusion out there. This article will identify common "myths" and equip you with the knowledge you need.
Myth #1 – To secure a mortgage approval, I need to have a down payment of 20% of the home's purchase price.
Many lenders, including UMCU, allow borrowers to put as little as 3.00% down to secure an approval. Similar to other loans, the larger your down payment the less you’ll ultimately need to borrow. However, the 3.00% requirement often opens the door to many more households who are working hard each month to save for this upfront cost. For more information about a 3.00% down payment, visit our mortgage page. You can also schedule an appointment, give us a call, or visit a branch! If you are searching for a mortgage near the Ann Arbor area, our local experts can walk you through these low-down-payment options.
Overpaying on your mortgage each month can save you thousands of dollars in interest.
Myth #2 – If I choose a 30-year repayment term, I’ll have to pay penalties if I choose to repay the loan in a shorter time frame.
Fortunately, it’s now rare for lenders to include any type of prepayment penalties for borrowers who wish to pay off or refinance their mortgages early. Paying off a 30-year mortgage in only 20 years with higher payments can save thousands of dollars in interest. When you learn how to calculate mortgage payments for different terms, you'll see just how much impact an extra principal payment can have on your long-term savings.
Myth #3 – I need a credit score of 720 or above to get an approval on my mortgage application.
While credit scores do play a role in the underwriting and approval process, many borrowers are approved for a home loan with credit scores much lower than that – starting at 620. Lender policies on credit will vary but always ask about how credit scores impact the interest rate you are offered. At UMCU, the rate published on our website is always the rate you will receive if approved.
Myth #4 – Private Mortgage Insurance (PMI) will apply to my home loan for as long as I’m making payments.
A down payment of less than 20% triggers PMI. However, as you continue to make monthly payments combined with the anticipated increase in your home’s market value, you’re likely to achieve a loan-to-value (LTV) ratio of 80% sooner than you think (usually around 5-7 years). Once that occurs, PMI can be removed.
Myth #5 – Consumer debt such as credit cards, student loans, or an auto payment is going to make it much more difficult for the borrower to get approved.
It’s very common for homebuyers to get approved for a mortgage with other debts, provided their income supports the payments and the debt-to-income ratio is generally 45% or less. Lenders focus on your overall monthly debt obligations relative to your gross monthly income, not necessarily your total debt balances. Consistent, on-time payments on existing debt can even help your approval chances.
Achieving homeownership is easier than you might think. Be sure to speak to a UMCU mortgage expert!
Summary
In summary, getting approved for a mortgage requires thorough financial planning, but is definitely doable for many. Lenders will review your application carefully, looking for overall financial stability demonstrated via a solid credit history, an affordable debt-to-income ratio, and a steady income. It’s also very important to have a well-thought-out monthly spending plan, for not only the mortgage, but for all your other fixed and variable expenses. UMCU has created a helpful guide for first-time homebuyers – we’re here to help you achieve your dream of homeownership!