As a first-time homebuyer, you probably have heard some questionable bits of information that have left you scratching your head. The truth is, there is quite a bit of misinformation out there that people unknowingly spread, and it could cause homebuyers to make costly mistakes in the end. Our expert Alberta mortgage broker team is here to debunk the top mortgage myths that many hear.
Mortgage Myth 1: Compulsory 20% down payments
We see this myth most often, stating that, unless you can put 20% of the value of the home down, you won't be able to get a mortgage. It's a myth that may have put many a new homebuyer off of buying a home. The truth is, you don't have to put 20% down. There is also the First-time Home Buyer's Incentive program that allows for down payments between 5% and 10%.
Even if you save up 10% for your down payment alone, you can still get a mortgage. However, you may be required to pay for mortgage insurance and your rates will be higher.
Mortgage Myth 2: start the mortgage application when you begin looking for a home
This is actually the worst bit of advice that you can get. It's beneficial to start your application process ahead of time. Getting a pre-approval lets you know exactly how much you can take a mortgage out for, which sets your price range for homes. Otherwise, you could end up being disappointed when you don't qualify for the amount needed for a home you were looking at. It also makes the buying process run smoother because you will have already gone through the mortgage application process, meaning there is less of a wait time or a chance of a sale falling through. Our advice is to start the mortgage application process as soon as you are able to.
Mortgage Myth 3: There is no difference between pre-approval and pre-qualification
While these two terms are often used interchangeably, they aren't the same thing. In fact, a pre-approval holds more weight than a pre-qualification. Pre-qualifications are less involved than pre-approvals. With a pre-qualification, the lender gives a general review of your finances and gives an estimated amount that you may qualify for. When you begin the application process, you may find that you qualify for less or more, after the lender goes through your credit history a bit more.
Pre-approvals are a bit more in-depth. Your lender goes through your finances more carefully, checking your credit score and credit report. They will make certain that you are able to meet their mortgage loan requirements. Once you are pre-approved, you are given a document/letter that will state how much the lender is willing to lend you, along with the interest rate you will get. There are also conditions that will need to be met at closing. Many sellers will choose a buyer with a pre-approval because it means a quicker sale and a lower chance that the sale will fall through.
Mortgage Myth 4: If your monthly rent payments are higher than a monthly mortgage repayment, you should have no issues getting a mortgage loan
Lenders look at many factors when deciding to approve you for a mortgage loan, so being able to cover the monthly repayments may not be enough. For example, if your monthly rent is $500 and your estimated mortgage repayments are $400, but you have a low credit score or a shady work history, you may be denied a mortgage.
When applying for a mortgage, underwriters and lenders will assess your income, financial situation, any outgoing debts, and so on. They need to determine your creditworthiness, and how much of a credit risk you are. Each lender will have its own set of criteria that you will need to meet. It is because of this that we advise homebuyers to shop around. You may not qualify with one lender but do fine with another.
Mortgage Myth 5: Always take the lowest interest rate you can get
Any homebuyer will want to get the best rate possible when taking out a mortgage, but the lowest isn't always the best. Some low-interest rate mortgages can have higher fees, or they may only be set for a short period of time. So they start out low but, after the time frame ends, they can shoot up if the market rates are higher.
You may also see mortgages with higher interest rates that offer cash back, which can be more beneficial than a lower rate mortgage. Our advice, when it comes to mortgage rates, is to choose a mortgage product that is balanced for your needs and financial situation.
When it comes to finding the right mortgage for you, using a mortgage broker, like our expert Alberta mortgage broker team, can help save you from costly mistakes and find you the best product. Give our team a call today and we'll get you started.