Buying a home can be terrifying if you’re a first-time home buyer. There is a ton of information out there, it is very easy to get overwhelmed. Maybe you’re someone who has avoided the process because you think you won’t qualify, or you can’t afford to do so. Or maybe you have been thinking about it for a while, but you have no idea where to start.
In this blog post, we are going to talk about 5 homebuying myths that scare first-time buyers so you can be informed of what you actually need to do. I’ve teamed up with the mortgage team at South Carolina Federal Credit Union to make sure the information is accurate and easy to understand.
Myth #1: I don’t need to talk to a lender until I’ve picked out the house I want.
You should start talking to a lender before you even start your home search. You’ll need to figure out your budget and get pre-approved – most Realtors will require a pre-approval letter before working with a client. Once issued by a lender, a pre-approval letter is typically good for 120 days. Especially in today’s market, you’ll want to make sure you are pre-approved so when you find a house you love, you can make an offer right away.
Myth #2: You need a lot of paperwork to apply for a mortgage.
Not really! A typical buyer will need bank account statements, paystubs, and W2s. If you are purchasing a home with a partner or spouse, both of you will need to provide these documents. For self-employed buyers, the income requirements are different, but it is still possible to get a mortgage when you are self-employed.
Myth #3: You have to have a lot of cash for a down payment.
Not necessarily true. There are several factors that lenders consider when determining eligibility, such as your credit score, your credit report, your income, and your debts. Those factors help them determine how much you can afford to pay for a house and what (if any) down payment you need.
Depending on your budget and other financial factors, you may be able to buy a house with no money down, 3 percent down, 15 percent down, etc. Talk to a lender at a local financial institution to see what offers they have for first-time buyers and what is realistic for your financial situation. If you are Military personnel, you may be eligible for a VA loan, which is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs.
It is important to note that some buyers are required to purchase PMI (private mortgage insurance). PMI is required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you do need PMI, you’ll be able to get rid of it after you’ve paid off 20% of the home’s value.
If you are worried about not having enough cash, you can start a sinking fund now. Depending on your other goals, you can start saving every month for any costs associated with buying a house.
Myth #4: All mortgages are the same, I just need to worry about the monthly payment.
Nope! Your monthly payment is very important, but there are a lot of different terms of a mortgage you should understand to determine what’s right for you, such as:
- Interest rate and whether it’s fixed or adjustable.
- Loan term (this is how long you will finance the home. The most common “loan terms” are 30 years and 15 years)
- Private Mortgage Insurance (AKA: PMI) – Private Mortgage Insurance (or PMI) is an added insurance policy for homeowners who put less than 20 percent down on the home they’re purchasing. PMI will be a monthly insurance cost incurred by the homeowner, and it protects the lender in case you fall behind on payments.
- Other things to think about: property taxes, HOA fees, homeowners’ insurance
Myth #5: There are a lot of other costs that come up during the process.
You shouldn’t incur any additional costs until you have an offer accepted on a house. Then, you’ll incur a few costs/fees, such as:
- Earnest money: This is an amount needed up front to lock in your dream house and begin the buying process. The amount varies and gets credited toward your down payment and closing costs (those fees that are required from the lender and the firm handling the escrow). Don’t panic, it’s your money and is applied toward the purchase of your new home. Your real estate agent will suggest an amount that works for the buyer and seller.
- Appraisal fee: It typically ranges from $450 to $650
- Home inspection: Typically ranges from $300 to $500, per the U.S. Department of Housing and Urban Development
When it comes time to finalize your home purchase, you’ll be responsible for providing your down payment (if you have one). Finally, at closing, you’ve probably heard of closing costs. There are a few different expenses buyers incur that are lumped into a “closing cost” line item. This includes things like an origination fee (typically a small percentage of your mortgage fee), title fees and similar expenses. Some buyers negotiate that the sellers will pay their closing costs in the purchase agreement.
Your lender should disclose the costs you’ll incur upfront so you aren’t surprised with unexpected expenses throughout the process.
There are a lot of factors that go into determining if/when you’re ready to buy a house – affordability, the housing market, housing inventory, etc. If you think you might be ready to buy a house or simply want to learn more about the process, talk to someone at a local bank or credit union. It’s nowhere near as intimidating as it may seem. If you’re located in South Carolina or want to buy a home in South Carolina, you can talk to the experts at South Carolina Federal. You can give them a call at 843-569-5145 or fill out this online form. I had many discussions with them and they are so helpful!
Are you planning on buying a home soon? What’s stopping you? Let me know in the comments!
South Carolina Federal Credit Union is an Equal Housing Lender.