The Federal National Mortgage Association, commonly referred to as Fannie Mae, conducted a survey last year in which they asked potential home buyers about the reasons they were still sitting on the sidelines (living with family or renting), rather than buying their own home.
What Fannie Mae learned is that many of the reasons buyers were not engaged in looking for a home is that Buyers were uninformed or misinformed about a great number of the financing requirements for making a purchase. Personally, I’ve found a great number of the prospective buyers I meet with have misconceptions about those same requirements…so let us debunk some of the myths that exist in the marketplace:
Myth: buyers must have a credit score in the vicinity of 700+ to be approved for a mortgage
Reality: some conventional loan programs may approve mortgages for consumers with a credit score as low as 620
Myth: lenders will require a 20% down-payment
Reality: There are programs that will approve loans with as little as a 3.0% (ie, Fannie Mae’s HomeReady program) or 3.5% (FHA) down-payment.
NOTE 1: And if buyers qualify for the NH Housing Finance Authority’s Home Flex Plus program, they may be able to obtain a grant that covers 3.0% of the purchase price – meaning you may be able to purchase a home for next-to-nothing out of pocket!
Debt-to-income Ratio (DTI):
Myth: buyers cannot have a DTI of more than 40%
Reality: some lenders / programs will allow buyers to have a DTI of as much as 50%
NOTE 2: Not all lenders are created equally! Banks lend to consumers based on their bank’s specific loan exposure and policies, whereas mortgage companies work with a wide variety of lenders who have varying exposure limits and more liberal policies.
NOTE 3: There are means for diminishing your DTI that most buyers do not know about…such as, the Mortgage Credit Certificate (MCC), which is available in New Hampshire. The MCC program is designed to help first-time home buyers with a tax credit. Because it is a credit and not a tax deduction, mortgage lenders may use the estimated amount of the credit – broken out as a monthly amount – as additional income to help the potential borrower qualify for the loan.
The 30-Year Plan:
Myth: First-time home buyers should always opt for the 30-year mortgage option
The majority of first-time buyers opt for a conventional 30-year loan; but, it’s not the only choice you have. There are a lot of advisors who will say, “Take the loan with the lower monthly payment…you can pay extra principal when you have extra money, and pay the base rate when you need to.” That may be good advice for most people, but not necessarily for everyone.
A 15- or 20-year loan will provide a lower interest rate…sometimes, considerably lower; but, it will have a higher monthly payment. EVERY month! Not just when it is convenient. So Buyers need to do a cost-benefits analysis of both options.
Can you afford the extra expenditure every month?
How much of your income is fixed (salary) vs variable (commission)? The more your salary that is fixed, as opposed to variable, the more likely you can manage the additional monthly expense associated a 15-yr mortgage over the long haul.
Over the course of 15 years, the amount of money saved with the reduced rate and shortened repayment period can be quite significant…but there will be lost opportunities (ie, investments, vacations) associated with the additional monthly expenditure. And then there may be extra expenses that come along that make the decision for you (children?).
So, you may want to ‘run the numbers’ with your lender.