Home buyers tend to make assumptions about the home buying process, especially about down payments. The truth is that since 2008, there have been some major regulation changes that have helped to stabilize lending. In the beginning the rules definitely tightened for a while, now they are slowly relaxing -although some FHA guidelines have become more strict lately.
Here are some facts to help dispel the mortgage myths floating around:
1- A big down payment is required. I still hear from buyers that they think they need 20% down. FHA only requires 3.5% down, VA is still zero down and conventional loans can be anywhere from 3-20% or more down. It's very common for conventional mortgages to have a minimum of 3-5% down depending on whether the buyer is a first time home buyer or not. If you choose to use conventional financing, you will need mortgage insurance unless you have 20% down.
2- We need perfect credit. Credit scores range all over from very low to over 800. Ideally you want to have a higher score but it's not required. You can get an FHA mortgage from many companies with a credit score as low as 620. FHA will allow lower than that, but many lenders have a credit overlay and will not accept scores below 620. The higher your credit score, typically the better your interest rate. You do want to make sure your payments are on time. If you have had a bankruptcy or a foreclosure, you will need to wait a few years (2 years for bankruptcies for FHA and 3 years for foreclosures on FHA loans).
3-Fixed rate loans are best. Typically many home buyers will use fixed rate financing – they know the interest rate and the payment will not change. However, if you know for sure you will only be in the home for 3-5 years, you may want to consider a 5 or 7 year ARM. That rate will stay the same for the first 5 or 7 years and then becomes an adjustable rate. Those rates are usually lower than the 30 yr rate and it may make sense for you to use an ARM. Just be aware of how long the rate is fixed and know that the rate will change eventually. Many first time homebuyers are more comfortable with a fixed rate and there is nothing wrong with that!
4-The home buying process will be quick. Over the last few years, it has been very common to see a quick closing, as short as 30 days, sometimes even faster. With the new changes this month, it will be more common to see closings about 45 days, maybe even 60 days. There are more regulations that lenders need to follow and documents that have to be signed by the home buyer before closing. The new closing disclosure has to go out about 6 days before closing and has to be signed and returned 3 business days before closing. So if you are closing on a Friday, the closing disclosure has to be back to your lender by Tuesday. If it's not back by then, your closing will be delayed. If you are buying a condo or townhome, it may take longer to get the required documentation back from the association or management company.
By working with a realtor and loan officer, you can find a home you want and get a mortgage that will work for you. Buying a home requires time and patience. You may need to provide your lender with more documents than you expected, but by following up with your lender and getting the documentation in as soon as possible, your closing will happen!