8 Mortgage Myths And Truths

Mortgage myths floating around on the internet can make it that much harder to understand what goes into being a homeowner.

We’ll clear up some of the most common mortgage myths – and clue you in on the most important truths – about buying a home.

1. You Need 20% Down To Purchase A Home

Many people – especially first-time home buyers – believe that if you don’t have at least 20% down, you can’t buy a home. This isn’t true. In fact, if you take out a conventional loan, you can buy a home with as little as 3% down. With ONE+ by Rocket Mortgage, you can get into a home with as little as 1% down.¹ Some types of government-backed loans even have 0% down payment requirements.

The 20% myth comes from mortgage lenders’ private mortgage insurance (PMI) requirement. PMI is a type of protection that compensates your mortgage lender if you default on your mortgage loan.

Let’s say you make a home purchase with a conventional loan, and you have less than 20% down. Your lender will require you to pay PMI. PMI affords you no benefits or protections as the buyer and can add quite a bit to your monthly payment.

The PMI requirement is why many financial experts recommend that you wait to buy a home until you have 20% down. Keep in mind that if you do buy a home with PMI, you can cancel your payments once you reach 20% equity in your property.

Other types of loans (like Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans) don’t require PMI but may require you to pay another type of insurance or funding fee. For example, all Federal Housing Administration (FHA) home loans require a mortgage insurance premium (MIP). MIP may expire after 10 years if you put at least 10% down when you bought a home, given you purchased it within a specific timeframe. Otherwise, you’ll need to refinance to a conventional loan once you’ve reached 20% equity in your home to eliminate the FHA mortgage insurance requirement.

2. Prequalification Is The Same As Preapproval

The main difference between preapproval and prequalification is the level of verification your lender does before they issue you an estimate. Let’s look at this difference in a little more detail below:

• Prequalification: When you get a prequalification, your lender collects only basic financial information. Most lenders rely only on self-reported financial data when they issue prequalification. This means that these lenders only offer a rough estimate of how much you can afford to take out in a loan.
• Preapproval: When you get preapproved for a mortgage loan, it means that your lender has verified at least some of your financial information. Your lender might require you to submit bank statements or allow them to view your credit report before you get preapproved. This makes a preapproval much more accurate than a prequalification.

As a general rule, you’ll want to get a preapproval before you begin shopping for a home. A prequalification can be a good first step to finding a lender you want to work with but being prequalified doesn’t carry much weight when you want to make an offer on a home.

Two important things to remember:

• First, each lender handles preapproval and prequalification differently. You may run into a lender that uses the terms “prequalification” and “preapproval” interchangeably.
• Second, remember that even with a preapproval in hand, you aren’t guaranteed to close a loan. After you find a home and make an offer, you’ll still need an appraisal before you can secure your loan.

At Rocket Mortgage^®, we offer a Verified Approval Letter (VAL) to give your offer a competitive edge. Our VAL verifies your credit, income and assets with documentation you provide us and tells sellers that your finances are in order and you’re ready to buy.

3. You Can Never Pay Your Mortgage Off Early

Some lenders may include clauses called “prepayment penalties” inside the terms of your loan. A prepayment penalty is an agreement that penalizes you if you pay off your mortgage too early.

Lenders earn money on loans when you pay interest on the principal you borrow. The longer you make payments on your loan, the more money your lender gets in interest. If you pay off your loan too soon, the lender earns less money than they expected.

If your loan has a prepayment penalty, it might stipulate that you cannot pay off your loan within 5 years of the date you close. If you do pay your loan off before the date stipulated in the loan terms, your lender might require you to pay any interest they would have earned upfront. This ensures that the lender earns back the money they expected when they issued your loan.

Prepayment penalties are much less common than they once were. Many lenders offer loans with no prepayment penalties at all. For example, if you choose Rocket Mortgage as your lender, you’ll never need to worry about dealing with a prepayment penalty. You’re free to pay off your loan as soon as you want, and you can make an extra payment toward your principal at any time.

4. Your Down Payment Covers Your Closing Costs

When most people think about buying a home, their first thought is their down payment. Your down payment is usually the largest payment you’ll make when you invest in a home, but you’ll also need to pay your closing costs.

Closing costs are processing fees that you pay to your lender in exchange for creating and finalizing your loan. Closing costs cover things like the price of your appraisal and your title insurance. Like your down payment, closing costs are due when you close on your home’s loan. Closing costs are independent from your down payment and can range between 2% – 6% of the total balance of your loan.

If you cannot afford your closing costs, you may ask the seller to cover a percentage of your closing costs (also referred to as