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Fact or Fiction: Mortgage Edition

Fact or Fiction: Mortgage Edition

Jun 1, 2021

Mortgages can be difficult and overwhelming to understand and all the mortgage myths floating around the internet can make it hard to separate from reality. We think it’s time to set the record straight on the most common mortgage myths.

You must have a 20% down payment to qualify for a loan

Fiction. While a 20% down payment has become the gold standard for home buying, it’s not a hard and fast rule. In fact, the average down payment for all buyers has been 12% in 2020 (it was only 7% for first-time buyers). Depending on your mortgage type, you can buy a home with as little as 3.5% down; some federally-backed mortgages don’t require a down payment.

How did 20% become the gold standard? It’s because of private mortgage insurance (PMI). Mortgage lenders require PMI for borrowers who provide less than 20% down to protect the lenders in case you default on your mortgage. PMI can add an average of $40 to $80 per month for every $100,000 borrowed. You can request to have your PMI removed once you paid a certain percentage of your loan. Check with your lender for details.

Prequalification and preapproval are the same thing

Fiction. These terms are sometimes used interchangeably (which adds to the confusion) but they are two separate things. The prequalification process uses self-reported financial information to give you a rough idea of how much you can afford to borrow. Financial proof of income and debt isn’t required in this step.

In contrast, preapproval is a formal review of your finances. Homebuyers must provide verifiable financial information such as employment, income, and expenses. You may be required to submit bank statements, pay stubs, and more to substantiate your finances before lenders commit to loaning a specified amount. It’s important to remember that being preapproved does not guarantee you will get a home loan. If anything changes your financial standing, like a job change, new debt, or a reduced ability to pay your debts, you may risk being denied.

Which one is right for your situation? If you’re just starting out, prequalification can be a good first step to figuring out your home budget and finding a lender you want to work with. When you’re ready to start shopping and placing offers, you’ll want to get preapproved.

Your APR reflects your loan’s true cost

Fact. The annual percentage rate (APR) is a comprehensive look at how much your loan costs. The APR includes the interest rate, points, insurance, and additional lender fees (e.g. closing, documentation, origination fees, etc.). When you’re shopping for mortgages (which you should do), use the APR to compare offers. This will give you a better idea of the deal than just looking at the interest rate.

You need perfect credit to get a loan

Fiction. Good credit is important but you don’t need perfect credit to qualify for a mortgage. Conventional loans backed by Fannie Mae or Freddie Mac require a minimum credit score of 620. You can qualify for an FHA loan with credit scores as low as 580. While you don’t need perfect credit, having a high credit score has its benefits. Not only does it show you’re responsible for repaying debts (something lenders love to see), you can also qualify for lower interest rates, which can save you thousands of dollars over the life of your loan. If you have less than perfect credit, here are some ways you can improve your score.

Lenders only look at one credit score

Depends. This one depends on who is applying for the mortgage. If you’re applying with a co-borrower, lenders will look at both applicants’ credit scores and typically use the lowest score between the two of you. While you can apply for a loan by yourself, lenders will only use your financial information to determine your creditworthiness. This is important if you need your partner’s income to afford the mortgage.

Don’t let these common mortgage myths keep you from pursuing your dream of homeownership. If you’re planning to purchase a new home this year, it’s worth doing the research to understand the truth behind home financing. When you’re ready to buy, visit us at to learn more about our new home communities in Lodi and Riverbank.