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Mortgage Myths & Facts

The real estate market has been sort of haywire for the past 18 months or so, and there are a host of reasons behind it. Some point to a shortage of available homes, and some say we’re facing a glut of empty ones. There are tons of questions about what the Federal Reserve will or will not do, and that has sent mortgage lenders scurrying about trying to determine where to set interest rates.

Acquiring a mortgage is perhaps the most important part of buying a home, and many folks are jumping into the market for the first time. We thought we would share some facts about mortgages and try to dispel some of the myths around them.

According to Merriam-Webster, a mortgage is “…a conveyance of or lien against property that becomes void upon payment or performance according to stipulated terms.”

The first mortgages, however, were known as “Mort Gaige.” That’s French for “dead pledge.” When a loan was paid off, it was known as “dead,” whether it was for a home or business purposes. The name has stuck to the housing market.

And you may have seen folks with a brightly-painted red door. While that’s a colorful statement for an entryway, the tradition started in Scotland. When folks finally paid off their debts, they painted their door red. Some folks say that it’s where we get the term “Out of the Red.”

So, what are some misconceptions about acquiring a mortgage?

You have to have perfect credit to qualify for a mortgage.

Your credit rating is certainly important when applying for any type of loan, but nobody has perfect credit. Most of us start building a credit history as young adults. We have student loans, credit cards, buy cars, and more. Lenders are going to look at your overall credit history when making a decision – not just that score. They’re also going to look at things like your debt-to-income ratio, how quickly you’ve paid off debt, and what sorts of assets you have. There are also a number of different lenders and ways to get a mortgage, and some cater to those with spottier credit ratings.

You should spend what you qualify for.

You may find yourself qualifying for a much larger mortgage than you anticipated. Just because a lender wants to give you $500,000 doesn’t mean you should buy a $500,000 house. More important than the amount of money you have to shop with is what it’s going to cost you monthly for the next 30 or so years. You should spend what you can afford the monthly payments for.

Don’t even apply until you have a 20% down payment saved up.

In a perfect world, nobody would need a mortgage. We would all have the means to save up enough to buy our own home and owe money to no lender. But that’s not the real world, and in the real world, it can be hard to save up that much money. That being said, it’s certainly good to have a nice nest egg that you can use for a down payment. And it’s certainly easier to get good terms on a mortgage when you’ve got a sizeable deposit at the ready. There will be more lenders available to you, and you’ll likely get better terms. But 20% is not a deal-breaker. Recent data says that the average person buying their first home only put down around 6%. As folks gather more equity and become more financially solvent, they move once or twice, and that amount rises. Those folks likely put down between 15-20%. There are mortgages available that only require a 3% commitment, and some don’t require a down payment at all.

If you’re thinking of buying a home, it makes sense to get your financial house in order. It would be prudent to pay attention to the news and do a little reading about what the Federal Reserve and financial markets are doing, and even what analysts are predicting. A great first step is arranging to meet with a financial planner or someone who specializes in mortgages to find out what’s available and where you stand.