Don’t fall for these 7 mortgage myths: What first-time home buyers should know

Buying a home is a major financial achievement that can sometimes feel out of reach for many people. Simply saving up enough to make a down payment can take time, and a mortgage is a major commitment. However, there are also common myths about home buying that can discourage prospective buyers from achieving their homeownership goals. Here are some common mortgage myths debunked, helping to demystify the mortgage process for first-time home buyers.

Myth 1: I can’t afford to buy a home

While buying a home is a major financial commitment, there are resources available to help offset some of the upfront expenses. There are several home loan options available for a low or even no down payment. For example, VA loans and USDA loans do not require a down payment - if you meet the eligibility requirements. There are also down payment assistance programs offered by state and local governments as well as nonprofits that are designed to help first-time home buyers. You could also explore different home types. The average cost of a condo or townhome can also be much more attainable for first-time buyers than a single-family house.

To see how much money you need to buy a house, enter your financial details into this free home affordability calculator from Rocket Mortgage. You also can estimate your monthly payment with this mortgage calculator.

Myth 2: I need to put 20% down to purchase a home

One of the most persistent mortgage myths is that you need at least 20% of the purchase price for a down payment. However, you have several lower required down payment options:

• Conventional loan: 3%
• FHA loan: 3.5%
• VA loans and USDA loans: 0%

With One+ by Rocket Mortgage, you can buy a home with a 1% down payment.¹

Keep in mind that if your down payment is less than 20% for a conventional loan, you’ll likely have to pay private mortgage insurance (PMI). All FHA loans require mortgage insurance.

Myth 3: I need a perfect credit score to qualify for a mortgage

While your credit plays an important role in qualifying for a mortgage, you don’t need perfect credit to buy a home.

For example, if your credit score is too low to qualify for a conventional loan, you may still qualify for an FHA loan. With an FHA loan, you can buy a home with a credit score between 500 and 579 with a 10% down payment. A credit score of at least 580 allows you to get an FHA loan with a 3.5% down payment.

Rocket Mortgage requires a credit score of 580 for FHA loans.^{2, 3}

Myth 4: Having debt is a deal-breaker

Most people have some kind of debt, whether it’s from student loans, a car loan, or credit card balances. According to a recent study by the National Association of REALTORS^®, nearly one-quarter of all recent home buyers and 37% of first-time buyers have student loan debt, with a typical amount of $30,000.

When it comes to qualifying for a mortgage, lenders do consider how much debt you have – but they’re also looking at your income. Your debt-to-income ratio (DTI) compares your monthly debt obligations with your income to see how much room you have for other expenses.

To calculate your DTI ratio, simply add up your minimum monthly debt payments and divide that sum by your gross monthly income. Then multiply that number by 100 to turn it into a percentage.

Here’s an example. Let’s say you earn $5,000 a month before taxes. Your monthly debt payments include $1,000 for your mortgage, $250 for student loans, and $250 for credit cards, totaling $1,500. Your DTI ratio is:

• 1,500 / 5,000 x 100 = 30%

Lenders often follow the 28/36 rule, which states that your housing expenses should not exceed 28% of your income and your total debt payments should not exceed 36%. A higher DTI ratio doesn’t disqualify you from a mortgage. Fannie Mae accepts conventional loans with a DTI ratio of up to 50%.

Myth 5: I should never get an adjustable-rate mortgage

Adjustable-rate mortgages have an interest rate that changes over time. Here’s how they work:

• Your loan has a fixed interest rate for a set number of years. This initial rate usually is lower than the rate for a comparable fixed-rate mortgage. The introductory period can last anywhere from a few months to 5, 7, or even 10 years.
• Once this period ends, your interest rate will adjust, typically once a year. Your rate can increase or decrease, which affects your monthly mortgage payment.
• ARMs usually have rate caps, which limit how much your rate can change at any adjustment. They also set an upper limit for your mortgage rate.

Some buyers avoid ARMs because they worry that their mortgage payment will increase and they won’t be able to afford it. While rates can increase, rate caps prevent them from exceeding a certain point. Make sure you can afford the maximum payment you may have to pay on an ARM. The low introductory rate can save you money compared with a fixed-rate loan as long as it’s in place.

If you think you’ll sell or refinance before your rate begins to adjust, an ARM can save you money. However, if you think you’ll be in your home for a long time and prefer a set monthly mortgage payment, a fixed-rate mortgage might be a better option.

Myth 6: I need to pay my mortgage off as quickly as possible

Paying off your mortgage early will save you money on interest. However, it’s not always an attainable goal or even the best financial move. For example, if paying off your mortgage early means sacrificing savings, investments, or emergency funds, it may not be worth it. You also may have to pay a prepayment penalty, depending on your lender. Furthermore, homeowners can often deduct mortgage interest payments from their taxable income.

Balancing your mortgage payments with your other financial goals can be a healthier long-term strategy so you don’t stretch yourself too thin financially.

You can use our amortization calculator to help you see how much of your mortgage payment goes toward paying off principal versus interest each month.

Myth 7: Renting is always cheaper than buying

The myth that renting is always cheaper than paying a mortgage overlooks the long-term financial benefits of homeownership. For example, even if you find a home with rent lower than the mortgage payment on a comparable home, you won’t be building any equity. In the United States, the median rent is $1,413, and the median monthly mortgage payment is $2,061.

Rent can also increase periodically, while the payment on a fixed-rate mortgage stays the same for the entire loan term. In that way, owning can be more cost-effective in the long run.

You can use our rent vs. buy calculator to help you see what makes the most financial sense in your situation.

The bottom line: Understanding mortgages is the first step to ownership

Buying a home is a major financial milestone and commitment. However, prospective home buyers often get discouraged by common myths and misinformation about the home buying process and homeownership journey. Separating fact from fiction can help you overcome potential barriers and achieve your homeownership dreams.

When you’re ready to take the next step toward becoming a homeowner, you can start your mortgage application with Rocket Mortgage.

¹ 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.

² To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

³ Rocket Mortgage is not acting on behalf of FHA or HUD.

The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.