You’re Not Alone

by Aly J. Yale, Contributor
FORBES – Real Estate

American consumers are vastly under-educated about the mortgage process, according to a new survey from Fannie Mae.   From having unrealistic assumptions regarding credit score, down payments and income requirements to simply being unaware of the assistance programs and resources that are out there, it seems there’s a lot of confusion surrounding homebuying and all that it entails.   Fortunately, for would-be homebuyers, it’s not all bad news. The findings suggest that Americans are actually making the mortgage process out to be harder than it is.

In fact, almost a third of those surveyed think credit scores need to be higher than FHA limits ask (500), while nearly half think minimum down payments are higher than actually required. (Some loans require as little as 3% down; USDA loans and VA loans require no down payment at all.) .  As Fannie Mae’s researchers explained, “For some Americans who would like to own a home, they could qualify for a mortgage but may assume homeownership is not a possibility.”

According to Mike Tassone, cofounder at mortgage technology firm OwnUp, it’s no surprise there’s so much confusion surrounding the process.   “There are more than 25,000 lenders, countless loan programs, different closing costs and endless fine print,” he said.   Even existing homeowners are confused about the process. Though slightly more homeowners are familiar with credit score and down payment requirements than renters, the difference is minor—marking only a one- to two-percentage point separation.

As Tassone explains, “It is a process that people engage in relatively few times in their lifetime and as a result, even if they become experts the first time around, much of that knowledge is forgotten or the products and processes change substantially between transactions.”

Are you considering buying a home? These experts bust the most common mortgage myths that are holding buyers back.

Myth 1: You need 20% down to buy a home.

“A common misconception is that 20% down is a requisite down payment. Instead, there are programs that allow people to buy a home with as little as 3% down (0% for veterans and through certain housing authorities). In fact, the average down payment in the U.S. is 11%.” — Tassone

Myth 2: The credit score you see is the same one your lender will see.

“The most common mistake buyers make is looking at the wrong credit scores that lenders on the mortgage side do not use (usually coming from a free credit monitoring company). Mortgage lenders presently use the FICO Score 2 with Experian, FICO Score 5 with Equifax and FICO Score 4 with TransUnion. They will pull a tri-merge with all three credit bureaus and use the middle of the three scores for pricing and qualifications.” — Andy Harris, president of Vantage Mortgage Group and member of the Association of Independent Mortgage Experts 

Myth 3: A lower down payment means higher interest rates.

“Often the rates are not materially worse for borrowers with lower down payments, although they will end up paying monthly mortgage insurance until they get to 20% equity. Also, in most cases, buyers can receive a gift for some or all of their down payment, provided that the down payment is from a family member.” — Tassone

Myth 4: All lenders are created equal.

“The biggest myth or issue we see is settling on the first lender they talk with. Many times a consumer will take a referral from a Realtor they are working with or a friend or family member. Seventy-seven percent settle on the first lender and don’t shop, which can greatly increase the costs they will face in both rate and fee, as well as the experience they will have if not checking credentials. Many times, those that refer one lender may refer one with unintended consequences. Any licensed professional being asked on the real estate side should be referring an average or they do their clients a disservice. Rates and fees and long-term monthly mortgage payments will always be higher if the consumer doesn’t shop for their mortgage.” — Harris

Myth 5: A low credit score is a dealbreaker.

“Credit score remains very important in the mortgage process, and for most lenders, it’s the single largest determinant of the rate they offer to consumers. It is less important in the qualification, as there are loan programs that can support borrowers with credit scores as low as 500. Generally, scores of 680-plus will qualify consumers for conventional financing, and we see the best rates and terms offered to borrowers with scores of 740-plus. That said, some lenders do not adjust for credit score and those who meet a certain threshold are eligible for that lender’s best rates. Because lenders have many different pricing models, shopping is critical in the mortgage process.” — Tassone

Myth 6: Find the home first; apply for your mortgage second.

“The first step is to be prepared and put the mortgage process ahead of the real estate to start. Commit to the pre-approval process up front, set a budget and ask questions. Then start looking at homes—not the other way around. When that happens, people end up rushing or getting placed or steered to the wrong lender, don’t have time to shop, etc. Know your target price, payment and down payment.” — Harris

For those looking to buy a home, Tassone and Harris recommend Freddie Mac’s Credit Smart education course and the OwnUp Resource Center for more information.