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

If you’re getting ready to buy a home, it’s essential to learn about the process and separate myth from reality. For example, contrary to popular belief, getting prequalified and preapproved for a mortgage is not the same thing. In the same vein, a mortgage application won’t reduce your credit score very much or for very long.

Here are seven mortgage myths debunked, helping demystify the mortgage process for first-time home buyers. 

Myth 1: I can’t afford to buy a home

While buying a home can be challenging, it’s likely within reach for most people. Most people think they can’t meet the credit requirements or afford the down payment.

The reality is that there are loan programs that offer low- or no-down-payment options and qualify borrowers with lower credit scores. Exploring your options likely will reveal that buying a home is more affordable than you think.

To see how much money you need to buy a house, enter your financial details into this free home affordability calculator from Rocket Mortgage®.

Consider your needs and wants

If you can’t afford the single-family house you ultimately want, consider a more affordable option such as a starter home, a condo, or a townhouse. Owning a home of any type can help you build equity that you can later use to trade up to a more expensive home.

As you compare homes to buy, carefully consider what you need versus what you want. How much you should spend on a house depends heavily on your preferences. Also, don’t forget to budget for closing costs, which typically cost 3% - 6% of the loan amount.

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

Many first-time home buyers believe you need at least 20% of the purchase price for a down payment. However, you can get a fixed-rate conventional loan with 3% down and an Federal Housing Administration loan with 3.5% down.

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

Veterans Affairs loans and U.S. Department of Agriculture loans typically have no down payment requirement, although private mortgage lenders that issue these loans may impose one.

The 20% myth originates from years before 1956, when a 20% down payment was the norm.

Today, putting down less than 20% when buying a home with a conventional mortgage means you’ll have to pay for private mortgage insurance. PMI reimburses lenders if you default on your loan, and you must pay it until you have 20% equity in your home.

To avoid falling for home financing or down payment misconceptions, check how much you need for a down payment with our down payment calculator.

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

While 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.

The Federal Housing Finance Agency recently announced that Fannie Mae and Freddie Mac will now accept loans from borrowers whose credit scores were calculated using VantageScore® 4.0. Since this system weighs credit differently than the standard FICO® Score, it could help borrowers qualify for a mortgage who otherwise might not be able to, especially those without a long credit history.

Myth 4: Having debt or student loans is a deal-breaker

Most people have some kind of debt, whether it’s from student loans, a car loan, or credit card balances. For instance, among recent home buyers, nearly one-quarter of all home buyers, and 37% of first-time buyers, have student loan debt, with a typical amount of $30,000.

That’s not to say debt doesn’t play a role, but lenders look at your debt in comparison with 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, add up your minimum monthly debt payments, divide the total by your gross monthly income, and multiply it by 100 to get a percentage. The lower your DTI ratio, the more room you have in your budget for expenses other than debts.

Here’s an example. 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. To calculate your DTI ratio, divide your monthly debt payments ($1,500) by your gross income ($5,000), and then multiply by 100 to obtain a ratio of 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 up to 50%.

To see how much you may qualify to borrow, enter your monthly debt into our affordability calculator.

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 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.

Many 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.

That said, ARMs aren’t right for everyone. 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. However, if you think you’ll pay off your loan early or plan to sell or refinance before your rate begins to adjust, an ARM can save you money.

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

While paying off your mortgage early will save you money on interest, it’s not always 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. Furthermore, homeowners can often deduct mortgage interest payments from their taxable income.²

Instead, balance mortgage payments with your other financial goals. This is often the healthier long-term strategy.

Rocket Mortgage offers an amortization calculator to help you see how much of your mortgage payment goes toward paying off principal versus interest each month, allowing you to plan accordingly.

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 $1,406, and the median monthly mortgage payment is $1,904.

Plus, landlords will raise rent periodically, while the payment on a fixed-rate mortgage stays the same for the entire loan term. As a result, owning can be more cost-effective in the long run.

Rocket Mortgage offers a free rent vs. buy calculator to help you see what makes the most financial sense in your situation. 

The bottom line: Know the truth about buying a home

When it comes to buying a home, knowledge is power. It’s essential to understand the process and what you really need to qualify for a mortgage. Taking the time to learn how the process works can help you plot a successful course to homeownership.

If you’re ready to take the next step toward buying your first home, start your application with Rocket Mortgage today.

[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] 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.