There are "no stupid questions" when it comes to home mortgages, but it is smart to be aligned with a local mortgage specialist that can demystify the process for you. In early September of 2021, I interviewed Noah Asbill (pronounced "az-bill") from Homeside Financial here in Raleigh, NC regarding the top 3 mortgage misconceptions he receives. From loan types to closing costs, this short video and below synopsis will reveal the truths behind common mortgage myths.
Misconception Number 1: You have to have 20% of the loan price as your down payment.
Loans can offered at as little as 3% down for a conventional loan. Commonly people confuse the information that having 20% down payment will allow you to avoid paying PMI or Private Mortgage Insurance, but it is not required to receive a conventional loan.
PMI is usually added to your mortgage payment when you put down less than 20% and can help you qualify for a home loa that you might not otherwise be able to get. Just note that the key word here is insurance--it protecting the lender—not the borrower.
If you are veteran or meet the requirements to receive a VA loan (check 2021 requirements here), many lenders including Homeside can offer 0% down.
Also, another way to put 0% down is through a USDA loan. Offered by the U.S. of Department of Agriculture, for specific properties in rural areas.
Reminder: It's imperative that you begin your home buying process with getting connected with a local lender before you start browsing houses, as only some homes qualify for VA limits and USDA areas.
Misconception Number 2: All you need is a down payment at closing in order to buy a house.
Wrong. In addition to the down payment (if your loan requires any), there will be closing costs to be paid at the time of close. Typically Noah sees, $4,000 to $7,000 in closing costs on top of the down payment.
Noah explains that some vendors like inspectors and appraisers require immediate payment while others will allow you pay them at closing.
Also, Noah points out that you're only paying the county taxes, HOA fees, mortgage for the days that you live there. So for example, if you close on October 1st, you are only responsible to pay for home-related expenses from October 2nd-December 31st.
Misconception Number 3: By choosing a "no closing cost" lender, you will be saving money.
Wrong. When advertisements claim that they can offer no closing costs, that's misleading. Lenders typically wrap in the closing costs in two ways--either by charging you a higher interest rate or by adding the closing costs to your loan amount.
"No lender is in the business of giving out free money," Noah jokingly reminds us. That $4-7,000 over the life of the loan compounds and ends up costing you a lot more in the long run.
The one caveat to this point, Noah explains would be if you were only planning on living in the house for a year or two. In this rare care, wrapping in your closing costs might make sense for you. However, the vast majority of people stay in their homes for 5-7 years.
In conclusion, there are many commonly known myths surrounding the home mortgage down payment and closing costs requirements. It's imperative to get connected with a local lender at the beginning of your home search in order to answer your specific loan questions and be set you up for long term success.