Buying a house today is absolutely different from buying one a decade ago. That’s why there are so many myths swirl around a process which is already a little bit difficult to understand. Here are the top four myths about buying a home today.
Myth 1: You need a 20% downpayment even to think about buying a home.
Totally false. “A down payment can be very low,” said Joe Parsons, senior loan officer with PFS Funding, a mortgage banker in Dublin, Calif. “There are conventional loans requiring just 3% for a down payment or even zero – the VA home loan program for veterans will cover 100% of the purchase price.”
Maybe five years ago, in the belly of the beast of the mortgage meltdown, 20% was in fact a necessity, but today most lenders are way more flexible. And if yours isn’t, look elsewhere. Shopping around for a loan should be just as important as shopping around for a new car would be.
Myth 2: Only those with perfect credit need apply for home mortgages.
Not true. The past half dozen years have been rough. High unemployment, a housing implosion, you know the realities. So do lenders, and because so many homeowners have been through a foreclosure, it isn’t as much of a black mark on you as it used to be.
Credit dings and blemishes, even a bankruptcy, short sale or foreclosure do not prevent you from getting a loan, even with a very low down payment such as 3.5% for an FHA loan. A new FHA initiative called “Back to Work” explicitly cuts the time to qualify for a new mortgage after a foreclosure, bankruptcy or similar to as little as one year for borrowers who can prove their past financial difficulties were due to extenuating circumstances out of their control.
Myth 3: Fixed rate mortgages are the only way to go.
Not true, said David Reiss, a professor at Brooklyn Law School who specializes in real estate. He elaborated: “The necessity of getting a 30-year fixed rate mortgage is one of the biggest myths about homebuying. The average American household stays in their home for about seven years. Typically, 30-year fixed rate mortgages have higher interest rates than adjustable rate mortgages (ARMs). Homebuyers should take a hard look at their plans for the new home.”
Only 6.5% of applications for mortgages in a recent period were for ARMs, according to the Mortgage Bankers Association. A typical ARM went out at 3.21% interest, versus 4.69% for a typical 30 year fixed rate. That adds up to a difference worth tens of thousands of dollars over, say, a seven year probable life of the loan.
You can do the math and see if it works for you.
Myth 4: Cut out the realtor, rep yourself and you will save a fast 3%.
That is just about never true.
The realtor’s commission is paid by the seller. In most contracts that realtor agrees to “co-broke,” which means he or she will split his commission with a buyer’s agent.
Most listing agents sign a contract with the seller for a certain commission percentage – for example, 6%. They offer to share a portion of that if a cooperating buyer’s agent enters the picture – for example, 3% – for bringing a buyer to their listing. If there is no buyer’s agent involved, the full 6% is still paid by the seller to the listing agent.
So buyers generally don’t pay for representation in the transaction. (See my ChrisTube video for a quick explanation.)
If you have questions or want to know if something you heard is a myth or true, let me know. I’ll be glad to help you understand the homebuying process.