In the US, there is a total of $9.9 trillion in mortgage debt alone. These days many people think that buying a home is unreachable. They typically think it is part of the American Dream, but not within their means. Because of this misconception, the process of buying a home is often put on hold before it’s even started.
However, there are a few things that every potential homeowner should know before spending their dollars on rent. Getting rid of these misconceptions will help when it comes time for you to buy a house.
Misconception 1: A large deposit is required to own a home
Many Americans believe home ownership is a dream because the down payments can be as much as 20% of your home’s purchase price. There are ways of getting around this.
A lower down payment, say around 3%, is possible for people with good credit. If a person’s credit score is high enough, he or she could be eligible for a 3.5 % loan from the U.S. Federal Housing Administration (FHA).
There are also great options available for veterans, or anyone who is prepared to buy in a rural area. These buyers may be able to get financing without any down payments at all from the VA and USDA loan programs.
Misconception 2: An excellent credit rating is required for a mortgage approval
There is no doubt that a high credit rating will improve your chance of mortgage approval and lowered interest rates. In the U.S., the FICO credit median score is around 700. The minimum credit score required for a conventional mortgage is 620. A score of 580 is required for an FHA loan with a 3.5% down payment. If a 10% down payment is made, your credit score only needs to be 500.
Data from FICO indicates that only 4.7% of the U.S. population has a FICO score below 500. This shows that your credit score on its own is not a valid reason to be rejected for a mortgage. Of course, there are other reasons that could lead to rejection.
Misconception 3: Debt from a student loan debt prevents home ownership becoming a reality
Many younger Americans with student loans delay even thinking about buying a home. What these recent grads probably don’t realize is that the guidelines for mortgage qualification have changed recently to encourage those with student loans debt to consider buying a home.
Two government-sponsored entities, Fannie Mae and Freddie Mac, publish the standards for approving conventional mortgages. What stands out the most is the debt-to-income ratio of the borrower. This is typically a borrower’s debt obligations calculated on a monthly basis, which includes a new mortgage as the percentage of their income before tax.
For example, a borrower with a monthly debt of $1,000 and an income of $5,000 would work out to be a 20 percent debt-to-income ratio (DTI). Up until quite recently, the maximum permissible DTI was 45%. Since July 2017, the maximum DTI has been increased to 50%, so that more first-time house buyers can get approved. This shows that student loan debt may not be as much of a barrier to mortgage approval as most people think.
It may not be so difficult after all to buy a home. This is true even if you don’t have as much money for a down payment, have a low credit score, or have student loan debt. The American Dream of owning a home can be a reality for you after all.