If you are on the market for a new home, these are the myths you need to stop buying into!
I Need 20% Down To Buy A Home. A 20% down payment will ensure that you don’t have to pay private mortgage insurance (PMI) on a monthly basis, but many homebuyers put down as little as 3.5%. PMI will typically cost you between .5% and 1% of the loan on an annual basis, but depending on your situation, it may be worth it. I’ve worked with clients who put down less than 20% in favor of saving some money for a rainy day knowing that they would have 20% equity in the home in just a few years. The Homeowner’s Protection Act Requires that PMI payments be automatically cancelled once the borrower’s loan-to-value ratio is at 78%. This means that lenders must stop charging PMI when homeowners reach 22% equity. However, you may request the PMI be cancelled once you reach 20% equity so pay attention to your principal balance.
I Should Spend The Amount I Qualified For. Do not automatically accept the number the lender gives you in a pre-approval or a pre-qualification as your budget. Firstly, a pre-approval and a pre-qualification are not the same. A pre-approval begins the underwriting process and is likely to be more accurate. A pre-qualification can be highly theoretical. Either way, this number is not guaranteed and a lot goes into finalizing a loan after you have a ratified contract on a home. Second, some lenders will budget for as much as 50% of your monthly earnings to go towards housing though it is typically 28% for conventional loans. You may not feel comfortable with this amount. After you get your pre-approval. Take some time to figure out logistics and meet with your financial advisor to get a more realistic view of what you are comfortable spending.
All Lenders Are Created Equal. Shop around for a lender. Running your credit more than once will not negatively affect your score. With the rollback of Dodd-Frank, I advise buyers to be very careful if something seems too good to be true. That being said, I work regularly with farm buyers and I find that local banks with an understanding of ag properties often have more options available. In fact, local banks have different underwriting requirements and are often a good choice for homebuyers regardless of the type of property.
Rent Is Cheaper. Rent goes up over time, a fixed-rate mortgage does not. Besides that, a mortgage often does cost less than rent though you will have maintenance costs to consider. A 5-year ARM mortgage might be a good choice for someone who might pay down or sell their home within 5 years as you get the lower rate for the first 5 years before the interest rate changes. So even if you think you might not stay put for more than five years in an area where property is increasing in value, it may be worth buying. After all, rent is increasing and rental properties can be a good investment should you decide to move away, but hold onto the home. That being said, I don’t typically recommend that buyers purchase a home if they don’t intend to keep it for more than 2-3 years. Flipping is the exception here, but more on that later.
2 Years With The Same Employer Is Mandatory. Think about all the people who buy a home because they are relocating for work. You likely need two years continuous employment to qualify for a loan, but it needn’t be with the same employer.
Flipping Is Easy. There is money to be made flipping houses, but it is not as glamorous as makeover shows make it seem and your profit margin may be smaller than you’d think. The most successful investors I know educate themselves on the market and tend to buy homes that need little more than cosmetic work. They often rent them out for a few years and then sell them. This covers costs and makes for a less risky investment, but bear in mind that tenants will put wear and tear on a home.
First, I’ll Find My Dream Home. Do not get invested in the idea of a home before you’ve laid the groundwork. Get your team together first. Find an agent and a lender that you trust and get pre-approved before you start seriously looking at homes. Losing the bid on a home is heartbreaking for many buyers. You don’t want to fall in love with a home that is out of your budget. You also don’t want to find your dream home and then find yourself scrambling to get your pre-approval letter and to find an agent to put your offer together. At certain times of the year—lookin’ at you, Spring Market—a few hours can cost you the house.
Inspections Aren’t Important. This idea is particularly prevalent among buyers looking at new homes or as-is properties. I have been in situations where buyers opted to nix inspection contingencies in order to win the house, but this isn’t always advisable. Many buyers find that newer constructions are built with poor quality design and materials. If you plan to buy an As-Is property to renovate, it is worth knowing what you are getting into. Note that As-Is doesn’t mean inspections can’t be written into the contract, it simply means that you cannot expect the seller to make repairs.
Spring Is The Best Time To Buy. Everyone knows that spring is often the busiest time of year in real estate. The weather is nicer, more buyers are out searching, and more homes are on the market. While you may have more homes to choose from in the spring, you are also more likely to get into bidding wars and end up losing out on a few homes before finally finding one. Spring is a good time to shop for families who need to move in and get settled before a new school year, but if you are not under this constraint, it may be worth skipping the spring rush. You won’t have as much competition in the fall and winter months. Even summer is quite a bit slower. Less competition often means less money spent.
There Is No More Negotiating Once You Are “Under Contract”. Anyone who has purchased or sold a home before likely knows that there are a number of things that can go wrong after a house is officially under contract. Financing can fall through or get held up and inspections can turn up all kinds of issues with the house. This is partly why it is important to have an agent help you navigate the process. They will be able to help you renegotiate should there be issues with timing or inspections.
Down Payment Is The Only Out-Of-Pocket Expense. Inspections and appraisals cost hundreds of dollars. You will also need to budget for closing costs. I am often able to negotiate seller subsidies to cover closing costs for my buyers, but if it is a very competitive market, a buyer who covers their own closing costs will be more appealing to a seller. Especially since closing costs will often amount to 2-5% of the sale price.
And Just for Marylanders:
I Won’t Qualify For First-Time Homebuyer Programs. If you’ve never bought a home in the state of Maryland, then you are a first-time homebuyer. Speak to your lender to find out what programs might be available!
Sarah is a Realtor specializing in residential and equestrian properties in both Maryland and Wellington, Florida.