Home Buying Myths: 5 Falsities Holding You Back
September 11, 2020
Some of the common knowledge about real estate is… completely wrong. I wanted to put together a list of five common home buying myths. These may be things your mom told you when you were young. Maybe you heard them on the internet from a financial guru. Not to knock their advice, but a lot of the general guidance is outdated.
I made this guide so that first-time home buyers can get a better picture of the reality of the process. By the end of this post, I hope you have a clearer understanding of what to expect. I also hope you realize that buying a home is likely significantly easier than you have been led to believe.
Home Buying Myth #1: I need to save a 20% down payment
This is the biggest of all home buying myths.
This is totally false, but let’s break down the reasoning behind it. You do not need a 20% down payment to buy a home. It is generally recommended for one specific reason: private mortgage insurance, or PMI.
What is PMI?
With many lending programs, if you put less than 20% down, you will be obligated to pay PMI. This will continue until you have made enough payments to have an 80% loan-to-value ratio (LTV). Each month, when you pay your mortgage, you will pay some interest and some principal. This means you are effectively buying a house a few hundred dollars at a time. Think of your LTV number as the amount of your home that you have not yet bought from the bank.
PMI sucks, period. It’s a monthly payment that insures your lender, rather than you or your property. You’re essentially paying an insurance policy for someone else. But it is necessary for most people, especially first-time home buyers.
Your PMI is hypothetically cancelled after about 5-7 years when you have reached 80% (or 78%, depending on some other factors). This also depends on your monthly payments, interest rate, etc.
But it may not happen this way.
How can you get out of PMI?
Say you’re buying a $150,000 house. A 20% down payment would be $30,000.
Now, $30,000 is a lot of money. It would take most of us decades to save that up. And it’s not like $150,000 even goes that far when it comes to buying a house. Depending on your market, that could be a McMansion, or it could be a studio condo.
But there are a few ways that you don’t need that 20%.
The best way is to buy a home that’s going to appraise at a higher value than your purchase price. If you’re buying a home for $120,000 that appraises at $150,000, you already have an 80% LTV. Sweet, right?
Those deals are hard to find.
But there are some other ways.
Real estate is popular in the first place because real property tends to appreciate over time. It increases in value. Now, the house itself is not an appreciating asset, but the land is. If you buy a home in an area that’s becoming more expensive (we’ve all heard “location, location, location,” right?), it works like this:
First, you could buy a home with a 10% down payment. Then, you can pay PMI for a couple years. Finally, you could refinance your home at its new, higher appraised value to get rid of PMI.
This is how a lot of people get out of their PMI well before they’ve paid down 20% of their original loan amount.
Buying a home with less than 20% down
Most lenders offer programs that will let you buy your first home with a low down payment. FHA loans are available for buyers with as low as 3.5% to put down, VA and USDA loans are available with 0% down, and many, many states and cities have programs to help first-time home buyers with down payment assistance (If you’re in New Mexico, I highly recommend getting with an MFA lender).
These options are outside the scope of this post, but I want you to take away one thing: the options exist.
2. I need perfect credit to buy a home
This one is pretty easy to disprove. In general, depending on the program you’re going through, it’s possible to get a mortgage even with a score in the low 600s.
Now, I won’t claim that you’ll get a good interest rate on these, but they are available.
3. I can’t buy a house after bankruptcy
This is super false.
Lenders do have a seasoning period after bankruptcy, but I filled out my mortgage application exactly two years after my Chapter 7 case was discharged and was approved within a couple days. And my rate wasn’t actually that bad!
So not only is this one of our home buying myths, but it’s also one I can personally disprove.
FHA loans have a minimum 2 year seasoning period. Conventional loans have a 4 year seasoning period. Research your options here, as always.
And it’s actually possible – not necessarily advisable, but possible – to have the seasoning period waived depending on the circumstances leading to your bankruptcy (like divorce, job loss, medical bills, and so on).
4. I can’t buy a house without a mortgage
Most people don’t realize mortgage financing is not the only financing available for buying a home.
Really, most people figure this out as investors, when they realize they can’t take out another mortgage to finance a really good opportunity.
There are plenty of ways to finance a home.
Rent-to-own (or don’t!)
One of the more well-known is a rent-to-own deal, which I have… strong opinions about. In a rent-to-own arrangement, you will pay a higher monthly payment – generally, market rent plus a certain amount that will be counted toward a down payment. While you are in the renting stage, you have no ownership claim to the home. You are simply a tenant. After a certain period of time, you will be expected to find financing to purchase the home, and that is generally through a mortgage. Depending on the terms of your agreement, if you cannot qualify for financing at that time, you will either lose your entire down payment or have to extend your lease.
In other words, rent-to-own agreements are occasionally predatory. I highly recommend you do your homework and consult a legal professional before entering one.
But there are other, better ways!
Other seller financing options
This arrangement works similarly. The owner of a home agrees to sell you the home for an up-front payment in cash. You make monthly payments over a certain period of time at a certain interest rate. It’s similar to a rent-to-own agreement, except that you have an ownership interest in the property from the very beginning and never pay rent (rather, you pay principal and interest, similar to a mortgage).
This might take the form of a “wrap,” in which the seller maintains their original mortgage, or the seller might own his or her home outright (or pay off the remainder of the mortgage with your down payment).
This can be an attractive option if you do not qualify for conventional financing because of, for example, short work history, a high debt-to-income ratio, a recent bankruptcy, or self-employment income. It also lets you avoid mortgage origination fees and PMI (or MIP, in the case of FHA loans). Bottom line? It may result in lower monthly payments, or at least make up for the higher interest rate.
Note: this is generally available in a buyer’s market. In a seller’s market, sellers are able to get multiple offers, most of which will close quickly with conventional financing (or cash). That means they will receive their full amount in a lump sum. In a buyer’s market, sellers are generally more receptive to negotiating terms on a sale.
Talk with a real estate agent (like me!) to learn more about this option and whether it’s likely to be available for you at this time.
5. Zillow can replace a real estate agent
Okay, maybe I lied earlier. This is the biggest of all home buying myths.
I know I’m a bit biased here, but I want to clarify something: real estate agents don’t spend our time looking for houses for you.
Well, we do. It’s an important part of our jobs. We don’t look at homes on Zillow, though.
When we’re finding homes for a client, we use a couple sources: the MLS (which is… similar to Zillow, but with way more options and way more accurate than Zillow), our own offices (my brokerage has 850 agents in it – you think all of our listings have made it to Zillow yet?), and pocket deals, which are homes that aren’t being marketed toward the general public (yet, or period, at the request of the seller), but can be accessed by us. This means we can do our homework and, if the property fits your needs, get you into the first available showing.
Lots of buyers enjoy looking at homes online and then sending them to their agents. That’s great! We love that! It helps us get a clear picture of what you want and to place you in a home that you’ll love much faster.
What real estate agents actually do
I think a lot of buyers think we browse photos and open doors when you’re interested in one.
It’s not. That’s like… 5% of what we do for you.
The other 95% comes once you fall in love with a place and decide you want to buy it.
Our job is to take your offer – in all its glory – and write the offer in a way that the seller will accept. We know what sellers want to hear, so we know how to write an offer.
Then, once the seller accepts your offer, our job is to help you meet all the requirements that you are contractually obligated to uphold. Not to overwhelm you, but that means addressing financing, home sale contingencies, insurance, inspections, appraisals (inspections and appraisals are the real negotiation, by the way – not the offer itself), title, surveys, HOAs, and CC&Rs.
What else real estate agents do…
Sometimes, we find the HUD identifier on a manufactured home that’s been smothered in stucco.
Or we figure out if a lender will accept a previous survey that hasn’t been recorded.
Occasionally, we call five different contractors to make sure they’re licensed, bonded, and insured and to get a quote for exactly how severe a sewer issue is.
Once in a blue moon, we make sure the seller has adequate liability coverage on a property so that if a home inspector falls through the roof, you don’t get sued for it (Did you know that in many purchase agreements, the buyer accepts responsibility for anyone injured during inspections?).
We help you fulfill your obligations in a way that doesn’t cause you to get sued in pursuit of your dream home.
Oh, and 99.9% of the time, you won’t even be the one who has to pay for our services.
Did you learn any new home buying myths?
Do you know any home buying myths you could add? Leave a comment down below if so!
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