4 Mortgage Myths That Delay First-Time Homebuyers
This time of year marks a very busy season for the housing market. The weather is improving, inventory has increased, and buyers and sellers alike have emerged from hibernation to put their much-anticipated homebuying and selling plans in motion.
It’s also a good time for aspiring homeowners to take stock. Is this the year you’ll finally go for it, or will you continue to delay buying a home yet once again? While there are many legitimate reasons to wait, there are also some common “barriers” that may be more perception than reality – particularly when it comes to myths about mortgage loans.
Are some of these mortgage myths holding you back? If so, you may want to take a second look – homeownership could be closer than it seems.
Myth #1: You need a 20% down payment
For many years, 20% has been considered the magic number for a mortgage down payment—anything less could tack on expensive private mortgage insurance (PMI).
Fortunately, today there are lenders out there (SoFi included) who offer mortgages with less than 20% down—and without borrower-paid PMI. That said, it’s important to consider how adjusting your down payment will affect your interest rate. But if getting into a home quickly is your priority, a low down payment can facilitate that goal. For example, you may be able to buy a bigger home faster if you only put 10% down instead of the typical 20%.
Myth #2: You Must Be Fully Approved To Submit an Offer (and the Application Process is Too Onerous for Your Busy Schedule)
In a competitive housing market, sellers typically choose the offer with the highest dollar amount and the fewest financing contingencies. This puts a lot of people at a disadvantage because even when they’re pre-approved for the offer amount, financing contingencies make their offer less attractive than all-cash offers.
This is one of the big reasons that the SoFi mortgage is so unique. We fully underwrite our members at the pre-approval stage, so many of our members can choose to submit offers with no financing contingencies and better compete with all-cash offers.
In addition, our pre-approval process is mostly online and exceptionally fast—we try to keep the paperwork at a minimum where possible.
Myth #3: You have too much student debt
With all the headlines about how student loans keep young professionals from buying homes, this myth warrants a much longer discussion (which we’ve tackled in a seperate blog post found here). Since most mortgage lenders require a debt-to-income ratio (DTI) of less than 36%, it can definitely be an obstacle, even for high-earners who have large student loan balances. It seems unfair that investing in education that helps you earn more should hold you back from home ownership.
At SoFi, we use a unique underwriting approach, which allows us to offer flexible DTI limits and ascertain creditworthiness based on other factors outside of the usual financial criteria (things like employment history and merit). The result is that our members can qualify for more financing than they would with a traditional lender. Meaning we see student loans as a good thing.
Myth #4: Buying a home in a rising rate environment
After nearly a decade of keeping interest rates at historic lows, the Federal Reserve began the process of raising its key interest rate—the Fed Funds rate—late last year and will continue to do so this year. While the Fed’s plan is to slowly and steadily increase rates over the next few years, this long-awaited “liftoff” has implications for first-time home buyers today.
For prospective home buyers considering a fixed rate mortgage, an increase in borrowing rates in the short term should only have a minor effect on monthly payments. However, acting sooner rather than later is your best bet for locking down the lowest rate possible.
Prospective home buyers looking to take out an adjustable rate mortgage face a greater risk over the next several years, with the Fed forecasting a progression of interest rate hikes. If adjustable mortgage rates rise in kind with rates during this period, the monthly payment and total interest cost on an ARM could increase significantly.
The takeaway? While the Fed’s small rate hikes probably won’t make big waves for mortgage borrowers in the near term, first time home buyers should consider the rising rate outlook when deciding which loan to select.
Making mortgages simple
Buying your first home can be a daunting experience, so it’s understandable that a difficult and restrictive mortgage process would be a big barrier to entry. But when the process is fast, easy and designed to help even first-time homebuyers qualify for more financing, the process of buying a home can actually be a positive experience. The SoFi mortgage allows our members to focus on the fun of achieving that next big milestone – because that’s really what it’s all about.
Download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.