I came across an interesting article on Yahoo about “Homebuying Myths” (click here to see the article). The article has some interesting information, but there are some things that I think could be added to make the article more helpful. Here is what I would add —
Myth 1 – You don’t need a 20% down payment to buy a home.
This is true. In fact, most of my clients do not put down 20% of the purchase price when they buy a home. FHA insured loans require only a 3.5% downpayment, and there are other loan products that require as little as 5% down. However, when you borrow more than 80% of the purchase price, your lender will require that you pay for mortgage insurance. The details vary, but I generally see payments in the neighborhood of $100 per month paid for about the first 10 years of the loan. This is in addition to principal, interest and escrow items. Although this should not necessarily deter you from buying a home, it is worth taking into consideration when determining how much to put down up front.
Myth 2 – Your credit score is good enough.
Another fair point. I would add that one easy way to increase your credit score is to ask your credit card companies for a credit limit increase. You may even be able to do it in a few minutes online. By increasing your available credit, you reduce your credit usage as a percentage of the available credit. This, in turn, should increase your credit score. Just don’t go and use all that new credit!
Myth 3 – Loan pre-approval determines your price range.
This is an excellent point. Lenders make money based on how much you borrow. They don’t care that you won’t be able to take a vacation for the next 5 years, because your mortgage payment has you tapped out every month. Reality check that monthly payment before you start looking at that 4 bedroom McMansion.
Myth 4 – Once I make the offer, the hard work is done.
I may be off base, but I don’t think people really believe this. But if you were under that misconception, just know that the contract is only the beginning of a long process. One great way to make the process easier is to have a great attorney at your side to guide you (Hint hint!).
Myth 5 – Your home purchase is non-negotiable.
Well, duh! But let’s put this one in proper perspective. Yes, everything is negotiable. However, sellers aren’t dumb. When you ask for closing costs to be paid, in the seller’s mind, it’s a deduction from the price offered. There’s no free money, so the Seller will take that into account when they counter. Some people will gross up the price in order to include a closing cost credit. This is fine, but it is important to understand that you are really just wrapping the closing costs into the amount borrowed and paying interest on it over 30 years. While that may work for you if you don’t have a lot of cash in your pocket to bring to closing, you’ll save interest in the long run by paying the costs up front. Closing costs are a fact of life when you buy real estate. The better strategy is to make sure your lender isn’t gouging you on their closing costs, regardless of who is paying them.
Myth 6 – You bought the perfect home.
Of course, there is no such thing as perfect. The best way to prevent regret is to do try to avoid a case of “oneitis” once you zero in on a home to buy. Believe me that there is always another property out there for you. If you keep that in the back of your mind, it will be easier to make the decision cut loose from a home that is increasingly looking like a lemon.
What do you think? Anything else to add?
As always, please do not hesitate to contact me at 773-632-8330 or patrick@loftus-law.com. And finally, as always, I am honored by your referrals. To learn more about my practice, please contact me! And if you are looking to buy or sell property, I would love to set you up with one of my fantastic real estate brokers.