You’re ready to purchase your first home — congratulations! While you may feel comfortable with the homebuying process, there are many myths about buying a home that first-time buyers fall prey to. In this blog, we’ll debunk seven common home buying misconceptions and offer first-time homebuyer tips to ensure the process goes as smoothly as possible.
Myth #1: I Won’t Have to Pay Closing Costs (or My Lender Will Pay Them)
In some cases, buyers think they don’t have to pay closing costs on their first home. However, this isn’t the case. Closing costs must be paid to finalize your home purchase and may include:
- Lender fees
- Title insurance
- Title-related fees
- Transfer taxes
- Prepaid items (property taxes, homeowners insurance, setting up escrow accounts, etc.)
If you’re in a low to moderate income bracket, some mortgage programs may offer closing cost assistance. Be sure to ask if there are ways to reduce your closing costs when you shop for a mortgage.
Myth #2: Lots of Mortgage Programs Offer 100% Financing
Another common myth about buying a home is that there are many mortgage programs with 100% financing. However, there are only two programs that actually offer 100% financing.
U.S. Department of Agriculture (USDA) Loans
To qualify for this loan, your home must be within USDA-designated geographical boundaries. While they’re designed to develop rural communities, some suburban areas also qualify for USDA loans. This loan requires a 1% upfront guarantee fee that can be rolled into your loan amount. Additionally, you’ll be responsible for mortgage insurance, but this lowers every year based on your principal amount. The seller may cover some of your closing costs, but there’s a predetermined cap.
U.S. Department of Veterans Affairs (VA) Loan
You must have at least two years of former military experience (or 90 days if you’re still enlisted) to qualify for this loan. VA loans allow credit scores as low as 620, but there’s a funding fee that can be rolled into your loan amount. There’s also no mortgage insurance required. The seller may cover a portion of your closing costs, but there’s a predetermined cap.
Myth #3: My Parents Can Co-Sign for My Loan
Many first-time homebuyers struggle to qualify for a mortgage due to a lack of credit history or student loan debt. While you may think you can get a co-signer like other types of loans, this isn’t the case with mortgages. However, you can get a non-occupant co-borrower to sign on the loan.
Unlike co-signers, co-borrowers have ownership interest in the property. Keep in mind that Fannie Mae requires that the down payment funds come from the occupying buyer. Co-borrowers can supplement the down payment, but the minimum amount must come from the occupying buyer.
Myth #4: I Have to Put 20% Down to Get a Mortgage
While 20% down helps you avoid private mortgage insurance (PMI), it isn’t a requirement to qualify for a mortgage. You can put as little as 3% down on a conventional mortgage, or even less if you qualify for USDA or VA loans. According to the National Association of Realtors, the median down payment on a home in the U.S. is 13%.
While you may be tempted to save until you have your 20% down payment, this isn’t always the best idea. For example, if you put 10% down on a home, you can use the money you don’t put towards the down payment to improve your overall financial health. This might include paying down high-interest debt, increasing your retirement savings, or building an emergency fund, which is especially important once you’re a homeowner.
Myth #5: I Have to Pay My Realtor Directly
Another common myth about buying a home is that you’ll have to pay your realtor directly. However, realtors are typically paid by sellers at settlement, where their fee is subtracted from the proceeds of the home sale.
Sellers take the realtor’s commission into account when they determine the listing price of their home. Realtor commissions are typically 6% of the home’s sales price, where 3% goes to the buyer’s agent and 3% goes to the seller’s agent. You won’t be able to negotiate realtor commission amounts, as they’re decided by brokers.
Myth #6: Increasing My Current Debt Before Settlement Won’t Affect My Application
It’s crucial that you avoid making any large purchases once you’ve gone under contract on a home. This can include items like cars, furniture, appliances, and lawn equipment. You also shouldn’t take out any new personal loans or apply for new credit cards.
Increasing your debt right before settlement may alarm underwriters, who play a major role in whether you get a mortgage. Plus, it can impact your interest rate, the mortgage amount you’re approved for, credit score, and down payment amount.
Myth #7: I’m Guaranteed to Receive Seller’s Assist
Another common first-time home buying misconception is that you’ll always receive seller’s assist. While you can certainly try for seller’s assist, Freddie Mac reports that only one in six people actually get it. Seller’s assist is usually requested as part of the original offer or if major issues surface during home inspections. They can be used to cover repairs, purchase mortgage points, or make a larger down payment to avoid PMI.
Ready to buy your first home? Visit our Mortgage Center to learn more about the products and services we have available. You can also contact our team of experts to discuss your specific situation and needs.