9 Common Mortgage Myths: The Truth Home Buyers Need To Know

It may well seem like you need to wield Excalibur and have armor impervious to dragons to brave today’s mortgage market, but it should be known that much of the common wisdom around mortgages has about as much veracity as these fantastic tales of old. Let’s shed the clarifying light of truth on some of these mortgage myths.

Myth 1: All Mortgages Are The Same

The truth: It would only be a slight exaggeration to say that there are as many mortgages as there are flavors of ice cream. We’ll get into many of the details on these loan options as we cover subsequent myths, but for now, here is a brief overview of some different types of mortgages:

• Loan types: Conventional loans offer some of the lowest available down payments and the mortgage insurance is removable. Meanwhile, FHA loans are more flexible for those with lower credit scores or higher amounts of debt. VA loans are perfect for eligible clients who are or have served in the military or their surviving spouses with low rates and no down payment. While Rocket Mortgage^® doesn’t offer them, there are even 0%-down USDA loans if you’re looking to live in an eligible rural area. Finally, jumbo loans are the ones for you if you need a loan higher than conforming limits, which are $766,550 in most areas for a one-unit property.
• Rate structure: If you have a fixed-rate mortgage, your principal and interest payments don’t change for as long as you have the loan. Adjustable-rate mortgages (ARMs) stay fixed for the first several years of the loan before adjusting based on market conditions at predetermined intervals after that (subject to rate caps and floors). By working with a seller or builder, you may be also able to get a temporary buydown of your interest rate so that for the first 1 – 3 years of your loan, you’ll have a lower rate than you will for the rest of the loan term.
• Loan term: The loan term is how long you have to pay off the mortgage. Everyone thinks of the 30-year fixed, and it is available. But when it comes to the YOURgage^® from Rocket Mortgage, you can pick any term between 8 – 29 years for a conventional fixed-rate loan. FHA and VA loans aren’t quite that flexible, but there are still several options. Shorter terms mean paying less interest, but longer terms have lower monthly payments.
• Primary vs. secondary mortgages: Unless you purchase a house with cash, you’re going to have at least a primary mortgage. Some people want to access their home equity, but they don’t want to get into a new primary mortgage and lose their low rate. If the math works, they may choose to take a second mortgage if the blended rate means they would save more money than doing a cash-out refinance. Rocket Mortgage offers both cash-out refinances and home equity loans.¹

There are even more mortgages than that, but these are some of the most common.

Myth 2: A Mortgage Lender Requires A 20% Down Payment

The truth: Depending on the type of loan you’re getting, you can usually get a 1-unit primary residence with a down payment anywhere between 0% – 5% of the purchase price.

Here’s a quick breakdown of the minimum down payments for a 1-unit primary residence by loan type:

There are a couple of notes on the above. To begin with, you can get a 3% down conventional mortgage if you are a first-time home buyer – defined as not having owned a residential property in the last 3 years. You may also qualify to put 3% down if you make less than or equal to 80% of the median income in your area.

Lenders may also have special programs and partnerships you can take advantage of. Our friends at Rocket Mortgage offer ONE+.² Those who qualify only have to put 1% down to receive a 2% grant toward their down payment. Moreover, as a borrower, you don’t have to pay for private mortgage insurance (PMI) under this option.

In order to qualify for ONE+, you’ll need to meet these requirements:

• The income you use to qualify for the loan can’t be more than 80% of the median income in the area where you’re looking to move.
• Your credit score has to be a median of 620 or better.
• This is only for single-unit primary residences.
• Together with the grant, your total down payment can’t be higher than 5%.

Of course, the size of your down payment tends to depend somewhat on whether you have the resources from having sold a previous home. The average first-time home buyer down payment was just 8% according to the National Association of REALTORS^®. The same study showed that the average down payment on a house by repeat buyers was 19%.

It’s worth noting that there are some benefits to putting down a higher amount on the order of 20% or more. For starters, along with your credit score, the down payment is one of the main factors in determining your rate.

Additionally, putting down 20% or more means avoiding PMI on any conventional loan. This helps bring down your monthly payment. On the other hand, PMI can also be removed by request once you reach 20% equity in your home in most cases.

Myth 3: You Should Pay Off All Debt Before Buying A House

The truth: You want a manageable relationship with your debt.

While it might be desirable to have all of your debt paid off before buying a house, most of the time it’s not realistic. There are car payments to think about, student loans to pay down and you might need the house for your growing family or as someone tired of renting.

The key factor isn’t necessarily that you have debt so much as the amount of debt you have; a key ratio in lending is the debt-to-income ratio (DTI). DTI is a comparison of your monthly debt payments compared to your gross monthly income, expressed as a percentage. To qualify for a mortgage, you generally want to keep your DTI at 43% or lower for the most options.

Another thing to know is that not all debt is treated the same way for the purposes of DTI calculation. If it’s your mortgage or a car payment, the monthly payment amount on your statement is the one that counts. The same is true if you have a personal loan.

Depending on your situation, for a student loan, you can be qualified with a statement amount or on the assumption that you pay off a certain percentage of the loan amount each month. When it comes to credit cards, you’re qualified based on the minimum monthly payment you would have to make for each account you have.

When considering which debt to pay off before buying a house, if any, consider your purchase timeframe. If you plan to buy a house soon, it may be helpful to pay off the debt with the highest monthly payments, because this will most directly impact DTI. If buying is further off, consider paying off the debt with the highest interest payments to keep more money in your pocket.

Myth 4: You Can’t Get A Mortgage With Bad Credit

The Truth: While having better credit helps in terms of approval and securing the best rates, your record doesn’t need to be perfect.

If you’ve had blemishes on your report in the past, you may be wondering if getting a mortgage with bad credit is even possible. If your credit report isn’t spotless, that’s not necessarily an automatic disqualifier. But before we get into that, let’s see the minimum credit score needed to buy a home:

There are some caveats here. Neither the USDA nor the VA have a minimum credit score requirement. However, this can vary quite a bit by lender. For VA loans, the minimum at Rocket Mortgage is 580. You’ll have more flexibility with the amount of debt you can carry if your score is higher.

Rocket Mortgage doesn’t offer USDA loans, but lenders will again have their own credit score requirement. It’s not uncommon for the qualifying score to need to be 640 or better.

Meanwhile, jumbo loans are sold to individual investors, so there’s more variance in the credit score. Rocket Mortgage requires a credit score of at least 680 for these types of loans.

If you’re not quite where you need to be yet with your credit to buy a home, there are things you can do to get your credit mortgage-ready. It just requires working diligently.

To begin with, monitor your credit for errors. You don’t want to be penalized for something on your report that’s inaccurate. There are also simple steps like making on-time payments, working to pay off debts that have the biggest impact on your DTI and using no more than 30% of your available credit limit at any time.

Beyond simply allowing you to qualify, improving your credit allows you to secure better terms on your mortgage, chief among them, lower interest rates.

Myth 5: Getting A Mortgage After Bankruptcy Is Impossible

The truth: There’s often a waiting period, but it’s very possible to buy a home after bankruptcy.

Buying a house after bankruptcy has its difficulties. You’ll need to reestablish your credit, largely by doing everything we’ve talked about in the above section. In addition, there are waiting periods in most cases. Mortgage investors and lenders have policies that will vary.

Here’s a look at the timing policies based on loan type after bankruptcy. USDA guidelines come from the Department’s lender handbook. All other waiting periods represent Rocket Mortgage’s policy:

Myth 6: There Is No Difference Between Preapproval And Prequalification

The truth: While prequalification can give you a good estimate of what you can afford, sellers and real estate agents look for a preapproval.

Lenders and other real estate professionals have been known to use the terms interchangeably, but there are really several differences between preapproval and prequalification. If you’re going through the mortgage process, it’s very important to understand these differences.

Think of a prequalification as an estimate of what you can afford and nothing more. You share with the lender a verbal or written best guess at your credit, available assets and income. The resulting number you get back can give you a great starting point for your home budget, but real estate agents and sellers will want to see things verified.

A preapproval goes a step further with actual documentation. In addition to performing a credit check, lenders will verify income and assets by collecting W-2s, 1099s, tax returns, statements for bank and retirement accounts and pay stubs.

As mentioned before, the big problem is that people use these terms as synonyms when they really aren’t. To make the differentiation clear, our friends at Rocket Mortgage refer to prequalification as a Prequalified Approval.

On the other hand, Verified Approval has all the strength of a traditional preapproval.³ Because we check credit and document everything related to income and assets, you and the sellers you make offers to can have absolute confidence that the number printed on your Verified Approval Letter is what you can actually afford.

Myth 7: You Should Find A House Before Getting Preapproved

The truth: You should always get preapproved before starting any serious home search.

There are a couple of key reasons to get preapproved before looking for a house, but the common denominator is the peace of mind it gives.

Sellers and their real estate agents want peace of mind that if they accept your offer, it’s going to close. While there are other reasons a transaction might fall through, if you have a rock-solid preapproval, they’ll have an assurance that you qualify financially. For this reason, many sellers will require you to have a preapproval in place before making an offer.

While it’s key to have that preapproval in many cases to even get a seat at the table, it also benefits you. If you go through the process and have everything verified, your preapproval will show you the top end of what you can afford. You don’t have to stretch your budget that far, but this will let you know how much flexibility you have in negotiations.

Myth 8: Winter Is The Worst Time To Buy A House

The truth: You may be able to find a good deal by shopping in the winter.

When it comes to looking for a home, there is no best time to buy a house. If you shop in the spring and summer, the most inventory tends to be on the market, but it’s also when there’s the most competition. Still, many people may prefer this because it’s easier weather to move in and those with children don’t have to switch schools in the middle of the year.

However, those buying in the winter may find they have more negotiating power. Although there’s lower inventory, those who are selling may have reasons to be motivated to sell quickly.

If they could wait, there probably wouldn’t be listings in cold-weather months, knowing the market will be bigger in the spring. Sellers may be more willing to make concessions on who pays what closing costs or the price of the home itself.

Myth 9: A 30-Year Fixed-Rate Mortgage Is The Best Option

The Truth: There are many home loan options and the best one for you is dependent on your financial situation and your future plans.

There’s no question that the 30-year fixed-rate mortgage can be a great option for many home buyers. It offers a lower monthly payment by spreading the cost of the home over a long period. It just shouldn’t be considered the default option which you should never deviate from.

When comparing 15-year versus 30-year loans, the shorter loan term means a higher payment but also less interest paid over the life of the loan. Depending on the length of the term, this could mean savings of thousands or tens of thousands over the course of your mortgage.

Another avenue to look at is an adjustable-rate mortgage or ARM. We briefly touched on this earlier, but these go up or down with the market (subject to caps and floors) after a fixed period at the beginning of the loan. These all tend to be 30-year terms, but if you see a 5-year ARM advertised, it means the rate stays fixed for 5 years before any adjustments.

These can be good if you want to prioritize lower payments at the beginning of the loan because the initial rate is lower with investors knowing the rate can always adjust to whatever the market is bearing at the end of the fixed period.

You can choose to pay off more of your mortgage balance upfront so that your payment will be lower even if the rate rises. If the rate happens to go down, that’s just a bonus.

Others may want that low rate so they can pay down the mortgage and refinance into a fixed rate if they qualify before the adjustment kicks in. Finally, this could also be a good option for a lower payment if you know you’ll probably be moving into another house before the adjustment ever happens.

The key to understand is that there is no perfect mortgage term that’s going to fit everyone’s situation, not even the legendary 30-year fixed-rate mortgage.

The Bottom Line: Know The Truth About Mortgages Before Starting Your Home Buying Journey

There’s so much that’s been taken for common knowledge about the mortgage process that’s not necessarily true that it can be confusing, especially for a first-time home buyer.

There is no perfect mortgage and although there are advantages, you don’t need to put down as much as you think. A credit ding isn’t permanently fatal to your chances of approval, even if it’s bankruptcy. Preapproval does matter and you should do it before shopping. Buy whenever you’re ready, and remember a 30-year fixed isn’t always the best fit.

Hopefully, you feel more confident that you know fact from fiction at this point. If you’re ready to move forward, start an application with Rocket Mortgage today.

¹Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.

² Client will be required to pay a 1% down payment, with the ability to pay a maximum of 3%, and Rocket Mortgage will cover an additional 2% of the client’s purchase price as a down payment, or $2,000. Maximum grant amount is $7,000. Offer valid on primary residence, conventional loan products only. Maximum loan amount of $350,000. Cost of mortgage insurance premium passed through to client effective January 2, 2024. Offer valid only for home buyers when qualifying income is less than or equal to 80% area median income based on county where property is located. Not available with any other discounts or promotions and cannot be retroactively applied to previously closed loans or loans that have a locked rate. This is not a commitment to lend. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply.

³ Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.