You have decided to buy a home or maybe refinance your mortgage and you started looking around the internet. You may have found some information that is confusing or you may think you know everything about the mortgage process. Even if you are familiar with the process, you may still believe some of this things. Here are four misconceptions that you may not be aware of.
1. 30 year mortgages are the best option – A 30 year mortgage is very popular these days but depending on your situation, they may not be the best option. If you are trying to keep your mortgage payment low, it is probably your best option. However, if you are calculating in the costs of your mortgage over the life of your loan, a 15 year mortgage will save you thousands of dollars. If you are interested in saving money and can afford the higher monthly payment, you may want to look at a 15 or 20 year mortgage.
2. Buying a home requires a 20% down payment – This used to be true many years ago, but it isn't the case anymore. Even in the last couple years, I would have clients tell me that they were trying to save the 20% they needed for a down payment. There are lots of loans available for as little as 3.5-5% down. VA and USDA loans still allow you to buy with zero down. You do need 20% down to avoid mortgage insurance, but you can buy with less than that.
3. You need perfect credit to buy – with the subprime mortgage crisis over the last few years, many people believe you need absolutely perfect credit to get a mortgage these days. This is not true- you need a 660 score for most conventional loan programs but you can get an FHA mortgage with a lower score. Most lenders would like to see a 640 score, but there are some that will go down to a 580 score. You do need a 2 year employment history and if you have had credit issues, you will need to write a letter of explanation. If you have had a bankruptcy, you will probably need 2 years after the discharge date and for foreclosures, you need 3 years. Conventional loans require longer waiting periods.
4. Refinancing always extends your mortgage for 30 years – this depends on how long you refinance your loan for. Many times it makes sense to do a shorter loan term so you do not have to extend your loan for another 30 years. Many people will refinance to a 15 or 20 year term, some even just do 25 years – that may keep your mortgage payoff date close to the original date. If you are trying to lower your payment as much as possible, you may want to do a 30 year term, but it's not required.
Getting a home loan can be stressful and at times very frustrating, but talk to your lender and make sure your questions are answered. The more you understand, the easier it can be. If you aren't sure about something, ask. Most loan officers are very willing to answer your questions and help you understand the process. If they aren't, you may want to talk to another lender. The mortgage process can be confusing but your loan officer should be willing to help you through the process.