Buying a house is not as hard as people make it seem. Common misconceptions include the need for a 20% down payment, it is cheaper to rent than to own or even you will have to pay your student loans first. When you go through the process a few times you come to know what you will need. The issue lies in what we are thought growing up. Most of which are simply not true or even misunderstood. Here we will discuss some of these myths.
1. You need a 20% down payment.
The truth is in some cases you do not need any money to buy a house. More on this in the near future. Check out buying a home with No Money Down.
The lowest down payment you can usually give is 3.5%! Here is the thing, you will have to pay mortgage insurance. The mortgage insurance or Property Mortgage Insurance (PMI) is usually around 1% of the home's value but can be much less. These types of loans are usually obtained by getting an FHA loan but, you can get a conventional loan at 3.5% or 5% down. This PMI can be removed after the appropriate LTV(Loan to Value) is met. The appropriate LTV is 80%. Once the 80% LTV is met then you can remove the PMI usually through a cancelation or a refinance.
There are also a ton of assistance programs that can be utilized to help buy a home. Not all of them are for first-time home buyers too. You can look at your cities government websites for all city programs for home buyers. Some will match your savings and still give you down payment assistance.
You can use money gifted to you so long as the finances are kept. On average the banks need approximately 3 months of gifted money to remain in your account. In this time frame, you will need records or sources from which the money came.
One should note that you can compound these to help your purchase. For example, you can get gifted money and use that money to cover the closing cost of your 3.5% loan using down payment assistance. Now that is barely any money out of pocket.
2. It is cheaper to rent than to own.
In some cases, this may be true. In a fixed-rate loan, your mortgage will stay relatively the same as rents continue to rise. If you own a single-family home you may also have added expenses you normally would not have to rent. Your boiler may go along with your roof.
However, when you buy a house your wealth goes up in terms of equity every year. This equity can be taken out to renovate or invest elsewhere so long as the LTV stays at 80% or below. This money is also non-taxable! That is on top of the fact that you are paying to own something. If you do it right you can have your tenants pay your mortgage and make a profit after that facts as well. While renting, that is money you are not getting back. Sure if you have the right structure then you can write off that as well but, that boils down to what your plan is. Make sure you have a plan. Are you looking to rent it out and make cash flow, live in, or flip.
3. You have to pay down your student loan debt.
No, you do not have to pay down your student debt. While this will make a difference in your DTI it does not have to be paid off. Neither do your credit cards. This is the amount your debt relates to your income. So if you make $1,000 and pay in debt $500, your DTI is 50%. Usually, you will want to be at 50% for a mortgage loan but, you can get a loan at 65% or higher. The banks can factor in the rent you would receive from any of other the units. The truth is you will not know until you try.
4. Your credit score must be perfect.
This one is huge. Many people usually wait until they have perfect credit scores and in many cases, this can take years, even well into your 30's. Credit is utilized for leverage. Your DTI determines how much you can borrow while your credit determines your creditworthiness and therefore, your interest. Yes, if your credit score is horrible you will pay way higher interest than that of someone with perfect credit but, you can still get the loan. When it comes to mortgages, interest rates vary. Look up the national average at that time. If it is 3.5% and your credit is 580, you could receive an interest rate of 3.8% or 4%. However, with "perfect" credit, you may be able to receive 3% to that standard average of 3.5%. The difference is not as bad as you may have thought. A few hundred dollars per month, if that.
5. Every lender is the same.
Wildly inaccurate statement. Every lender is completely different. Yes, there may be similarities but, not the same. Often I hear: "go with these people they approved me, they'll get you pre-approved," but, they didn't get pre-approved. Then you will go to another bank and get approved by that bank. Here is the thing: Banks go through cycles. While this month they were looking for mortgages, next month they won't. Instead, they are looking for new accounts, auto loans, or CD purchases. Banks will never tell you this, instead, they will have you go through the process just to say "You are" not eligible for a loan at this time.
Every lender also has different requirements. While most may follow Fannie Mae and Freddie Mac guidelines, they sometimes throw in extra qualification details. Each lender has its approval standards. These may vary in terms of credit scores, income requirements, debt levels, and more. They may also change monthly, weekly, or even daily. They can also vary by location. Which means each one will give you a different deal. It pays to shop around!
6. Now is a bad time to buy.
It is always a bad time to buy to some or someone. The real question that needs to be asked to the naysayer is, why? They may tell you things like "we are in a price boom/bubble." However, interest rates are at a lower rate. Lower than they were years ago. For some added reason millennials are avoiding homeownership. Reference this research done by newsilver. Perhaps the growth in wealth gap or misinformation. Misinformation is huge so make sure to do your research. Especially on misinformation like: "It is all going to crash!" Yea, that is what they said last year, and the year before that, and the year before that. Actually, in 2019 it technically "crashed" in some markets. Certain states and townships saw housing corrections in prices. Guess what? Those same markets saw housing appreciation continue to rise after that. So your $1 Million home dropped to $875,000 a mid-year and at the end of the year back to $950,000. One year after that $1.25 Million. Housing prices will continue to increase.
So when is it a good time to buy? This depends on many things a lot of which have to do with you. Generally, you can say when prices are low. A good determination is an inventory. How many months of inventory in the market are left? This means if houses stopped being listed and people were to continue buying the market would dry up in "X" amount of months. When it is under 3 months prices go up since there are fewer properties on the market and therefore more competition. When they are well above the prices are lower. Houses have to sit for longer and therefore the competition is reversed. The homeowner has to now reduce prices to compete with the market to sell.
However, as was said it depends on you whether it is the right time to buy or not. You may be relocating for a new job so, therefore, need to move into a new house for your family. There may be a 1031 exchange pending so you have to rush to find a property. You may be looking for a property you can rent out and want to get in now. Well knowing that properties are on the rise and you want to make a profit well, interest rates are low and therefore can increase your wealth and cash flow. Had the interest been high that could eat at your profit cause you to be more strict with the math on your property.
7. You need to have m0ney to do repairs.
There are many ways to get money for repairs. Look into 203k loans in which the bank loans you money to repair your home. You could go private or hard money as well lessening the restrictions you may have with a 203k loan with contractors. You can utilize a Home Equity Line of Credit(HELOC). None of these would be your own money but, the money nonetheless. So I apologize, you do need some sort of money for repairs but, it does not have to be your money.
8. Find the house you want first!
Not the way to go! It is very easy to get caught up in the dream home. The reality is that your dream 7 bedroom 8 bath 12 car garage with a pool at $3 million may not be in your budget. It is important to know what you are looking for. While you may want all that, what the bank may tell you you can only afford $500,000. This is why you need to get your pre-approval first. After that, you can build. Use a realtor to get a more realistic idea of what you can afford.
9. Once you get pre-approved you are cleared to close.
A pre-approval does not guarantee you will close. You can get denied after the fact especially if your employment status changes or your debt to income changes. Sometimes people get excited and think they are in the clear will go shopping. One of the most common I have seen is during Christmas time. Do not get another loan or go for a big purchase while waiting to close.
10. Always go for 30 year fixed mortgage loan.
There are dozens of types of loans. Some of the most common ones are.
The one that works for you is the correct one. Each one has its pros and cons. It is important to realize that once you start investing you may encounter different loan types; ARM Loans, Private Loans, Commercial, Construction/203K Loans, Balloon, Piggyback, Reverse, Refinance.
11. The home-listed price is the final price.
Simply put, what a buyer is willing to pay is the final price. Bidding wars are a thing and they can significantly bring you way over the asking price. Even if you don't get outbid, there are other costs to consider in addition to the listing price. There is also another cost to consider like closing fees and taxes are two to consider. At that point, you also have to worry about utilities, HOA dues, repairs, and insurance. Does this new price fall into your budget?
While I'm sure there are many more out there, these are just some of the common ones you will run into. Make sure to check out our blog for updates and information.
Don't get caught up in the misconceptions of Buying and Investing in Real Estate Reach out NOW!
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