9 Misconceptions About Buying Your First Home

Buying your first home is a confusing process, and it doesn’t help that there are loads of common myths about real estate that you probably don’t realize you’re buying into. Here are nine misconceptions that you should understand before you launch into the process:

1. IT’S A GREAT INVESTMENT.

While it’s true that buying a home can be a smart financial choice, it’s not always the cash cow people think it is. In many housing markets, calculations show that over the last 126 years, U.S. house prices have risen just 0.37 percent annually. Whether or not buying a home is a smarter financial choice than renting depends a lot on housing prices in your area, how long you plan to stay there, and various other factors. Not to mention that housing bubbles can burst.

2. YOU NEED EXCELLENT CREDIT.

If your credit score has taken a nosedive, it doesn’t necessarily mean you can’t purchase a home. You may need to put down a larger down payment or get a federally insured loan, but it is possible. You can also try to explain your credit history to a lender, letting them know that you have been dealing with late medical bills or hefty student loans.

3. YOU CAN’T QUALIFY FOR A MORTGAGE WITH STUDENT LOANS.

Being in debt doesn’t necessarily make you ineligible for home ownership. Mortgage lenders look at your debt-to-income ratio, meaning how much you bring in each month compared to what you owe in student loans, car payments, credit card charges, etc. If you have a good handle on your student loan payments and can still afford a monthly mortgage payment, you’re fine.

4. YOU SHOULD FIND A PLACE YOU WANT BEFORE APPLYING FOR A LOAN.

You should figure out what kind of loan you can get before you start touring potential homes. It will save you time and headaches down the road. A bank will need to extensively check your assets and credit score before agreeing to lend you many thousands of dollars, so it’s best to get started early. Apply for a mortgage before you find a place so that you can be sure of your finances and potentially lock in an interest rate.

5. IF YOU PRE-QUALIFY FOR A MORTGAGE, YOU CAN AUTOMATICALLY GET A LOAN.

Pre-qualification, which is not the same as pre-approval, is kind of like background-check lite for banks. You let the bank know what your financial situation is, and then the lender lets you know what kind of mortgages you could qualify for. But it doesn’t involve a detailed perusal of your credit score, and you still need to submit an official mortgage application and get approved for a specific mortgage.

6. YOU NEED A BIG DOWN PAYMENT.

While the 20 percent down payment is considered standard, it’s not necessarily the only option. Low- and no-down-payment loans do exist, although you may end up paying a larger interest rate. With federally insured loans, people with good credit can pay as little as 3.5 percent down.

7. THE PRICE YOU SEE IS HOW MUCH YOU’LL PAY.

If you put in an offer for a $200,000 house with a down payment of 20 percent, you’ll be paying more than just that $40,000. There are always closing costs, like taxes, escrow, attorney fees, and more, that you end up paying to third parties.

8. YOU SHOULD SPEND AS MUCH MONEY AS YOU QUALIFY TO BORROW.

A bank may be willing to let you borrow $600,000, but that doesn’t mean you should. Make sure to calculate the full cost of buying (including closing costs and expenses like homeowners insurance, taxes, and repairs) and be reasonable about your monthly budget. Plus, if you borrow less and put down a higher down payment, you can often lower your interest rate and monthly payments.

9. YOU’LL GET A BIG TAX BREAK.

While it’s true that having a mortgage qualifies homeowners for some major tax deductions, the tax break isn’t always as advantageous as it might sound. You can only take a tax deduction on your mortgage interest rate if it tops the standard deduction ($12,600 for couples filing jointly), and then you have to itemize every qualifying expense. Even if you do take the deduction, you’re probably not saving as much on your taxes as you’re paying to the bank in interest. Many people opt to just take the standard deduction instead.