From US News 10/9/14
After all, in the years before the Great Recession, homebuyers weren’t intimidated at all. For quite a few years, many people purchased homes that were out of their price range and often on shaky credit, but since lenders didn’t seem concerned, homeowners weren’t either.
Now, the tide has turned, and prospective homeowners are understandably more leery about making what will likely be the largest purchase of their lives. But maybe they’re too leery. According to a survey of 2,017 adults released last month by Wells Fargo & Co., the country’s largest mortgage lender, many borrowers who can afford a home may be frightened off, believing that buying a house is something they simply can’t do.
If you’re on either end of the spectrum — squeamish about homebuying or ecstatic with no worries whatsoever — here are some misconceptions about mortgages that may bring you to the middle.
Your credit has to be perfect or near-perfect. Two-thirds of the Wells Fargo survey respondents believed you have to have a very good credit score to buy a house. While there’s no doubt that a high credit score will help you get a better loan, it isn’t a deal-breaker if your score is middling. If you have some credit blemishes and financial scrape-ups but for the most part pay your bills and make steady income, you probably don’t have much to worry about, experts say.
“While credit is scrutinized, some loan types will allow credit scores as low as 620,” says Gaye Rowland, senior vice president of SharePlus Bank, headquartered in Plano, Texas. “Other compensating factors such as larger down payments or low debt-to-income ratios can offset some negative credit information. Every situation is analyzed individually.”
You must have a down payment worth 20 percent of the purchase price. This, too, is a myth. More than 40 percent of Wells Fargo respondents believed the only way to buy a house was to give a lender at least 20 percent of the purchase price of a house.
Again, it helps to have a 20 percent down payment, particularly if you want to avoid paying monthly private mortgage insurance. But many banks and mortgage companies — especially now that the recession is several years in the rearview mirror — offer loans that don’t require a down payment anywhere close to 20 percent.
“We offer many programs that either have 100 percent financing or a 3.5 percent down payment,” says Alyssa Schwabe, a spokeswoman for GSF Mortgage, headquartered in Brookfield, Wisconsin.
A house is a great investment. It can be a good long-term investment, but nothing in real estate is guaranteed. Particularly if you plan to live in the home for several years, and you can’t afford to lose a lot of money, you need to think of your house as a house — not a financial tool designed to pad your investments or retirement.
“People tend to purchase their homes with a little bit too much of an investment mentality,” says Michael Goodman, a certified public accountant and financial planner at Wealthstream Advisors in New York City. “I’m not saying it isn’t part of your overall net worth, but the home purchase really should be for somewhere you’re going to live.”
He adds that some wealthy homeowners additionally get too caught up in the idea that owning a house is a way to reduce taxes. “People will tell me that they need a tax deduction or a better tax deduction, and so they’re going to buy a bigger home. I think that’s the stupidest thing I’ve heard,” Goodman says.
“Housing is not a great investment,” says Eddie Seiler, director of mortgage finance at Summit Consulting, based in the District of Columbia, and a former director at Fannie Mae. But Seiler doesn’t mean people shouldn’t buy houses. It’s just that they shouldn’t sink a lot of money into one and count on getting it back.
If you color yourself dubious, Seiler points to findings by Robert J. Shiller, economics professor at Yale University and Nobel laureate. “House prices only rise at a very low rate in the long run and can show negative real growth for long periods of time,” Seiler says.
You own the house the moment you get the keys. That’s how many homeowners think, Seiler says. But make no mistake: At the outset, if you haven’t put much down and have no equity, your bank really owns your house. After all, consider how much interest you’re paying in the beginning.
“If one has a $100,000, 30-year fixed-rate mortgage at 5 percent, the unpaid balance paid down will be less than $9,000 after five years — and less than $20,000 after 10 years,” Seiler says.
Owning a home is the American dream. It may be your ultimate goal, but don’t get tunnel vision.
“Many people believe that owning a home is the American dream. For many, it’s also their nightmare,” Seiler says. “For example, when the economy tanks in a specific geography — think Detroit — it’s hard to sell and move to an area with jobs.”
It also makes matters worse if you can’t afford your mortgage payments and fall behind. That’s why you shouldn’t rush into taking on a mortgage. You may feel like having a house means you’ve arrived, but arriving is no fun if you can’t afford to stay.