Lafayette Federal Credit Union
Vice President, Mortgage Originations
Renting is always cheaper than buying.
There's a common misconception that renting is always cheaper than buying. Maybe this has been keeping you in your rental property for the last several years. But the truth is, renting isn't always cheaper than buyingOpens in New Window, and you could be saving money in the not-too-distant future by moving forward with a purchase.
There are valuable benefits to renting, and sometimes, it’s the better choice for certain people. Notably, renting provides predictable housing costs, freedom from paying for repairs, and the flexibility to move with little to no hassle.
However, renting doesn’t allow for building equity (your property’s current market value less any liens that are attached to that property). Instead, you’re paying money (i.e. rent) each month that you won’t see again. Alternatively, making a mortgage payment is, (in an indirect way) paying yourself. You’ll build equity in your home over time that, if needed, you can borrow against or profit from when it comes time to sell.
There are a lot of other factors that determine whether you should rent or buy, including your credit history, lifestyle choices, and the length of time you plan to live in your home. You can talk with a professional or use an online calculator to help you determine if it might be time to consider buying a house.
You need to have zero debt to get a mortgage.
Most Americans carry some sort of debt. And millennials — many of whom are in the market to buy their first houses — owe an average $40,000Opens in New Window in student loan debt in particular. These numbers sound crippling, and while they do carry a lot of weight, this doesn’t necessarily mean those with debt are unable to buy a house.
What’s important to lenders, more so than whether or not you have debt, is what’s called your Debt-to-income ratio (DTI).Opens in New Window Your DTI is the percentage of your income that’s going toward any debts you have, plus housing-relating costs.
The lower your DTI, the more likely you’ll get approved for a loan. Generally, the Federal Housing Association’s (FHA) guidelines approve mortgages with DTIs up to 43%. So while debt does play a role in getting a loan, looking at your entire financial picture is what matters most.
Preapproval and prequalification are one in the same.
Mortgage pre-approval and pre-qualification sound like they could mean the same thing, right? They aren’t the same, and the difference is important!
Prequalification is an initial phase in the homebuying process. It’s meant to help you (the homebuyer) understand how much you can and should spend on a house. It’s an estimate of how much money a lender is willing to let you borrow based on the information you provide regarding your financial situation. It’s great information to have, as it allows you to get a sense of where you stand financially when it comes to homebuying, but it won’t be advantageous to you when making an offer.
Alternatively, a preapproval holds more weight for a potential homebuyer. A preapproval includes a thorough look at your finances (including a credit check). This process gives you a solid estimate of how much you’ll be able to borrow and what your interest rate will be. Once you’re preapproved, you’ll also get a letter that you can include with your offers to show sellers that you’re committed and able to afford the house.
You need a perfect credit history/score to get a mortgage loan.
While it is highly recommended to build your credit score in the years and months leading up to purchasing a house, it’s a myth that you need a perfect credit score to get a mortgage loan.
Of course, lenders look at your entire financial picture before offering a loan. Your credit history and score are just a few components of what is reviewed. An important factor is your debt-to-income ratio (DTI)Opens in New Window – a ranking that’s not necessarily reflective of your credit score.
Some lenders will approve loans with lower credit scores for non-traditional mortgage loans. FHA loans, VA loans, and USDA loans have lower credit score requirements than conventional loans, which typically require a score above 620. FHA loans are available options to those with credit scores in the 500s.
You need a 20% of the purchase price as a down payment.
While a 20% down payment used to be the standard for buying a home, it’s not always necessary to buy a house these days. Typically, 20% is often the benchmark used by lenders to determine whether they require borrowers to purchase private mortgage insurance (PMI). So, if your down payment is less than 20%, you can still obtain a mortgage with PMI (provided you meet the lender’s other qualifications).
In 2021, the median down payment was only 13%Opens in New Window. For first-time buyers, that number was even lower. Some lenders don’t require any down payment - Lafayette Federal Credit UnionOpens in New Window offers 100% financing options.
If you are able to put a 20% down payment on a house, that is great. There are certainly reasons why it's advantageous — including not having to pay for PMI, potentially getting a better interest rate, and having lower monthly payments. However, as stated above, there are plenty of options for those are unable to do so.
You should wait for the lowest mortgage rates.
Don't let current mortgage rates (or forecasted mortgage rates) dictate when to buy a house. Nobody knows for certain when mortgage rates will rise or fall, despite professional predictions.
As a prospective homebuyer, you might be eagerly awaiting lower interest rates — even if they're already pretty low. Understandably, you might be determined to get the best interest rate you can to have the lowest monthly payment possible. However, when interest rates do drop, you might feel the pressure to immediately act on a house before you’re ready — or on one you can’t afford - neither of which will benefit you.
An important note: a low interest rate can offer a close affordability to that of the lowest interest rate. The difference in the payment between loans with a 0.125% rate differential can be minimal, and with good budgeting, can be very manageable.
Additionally, you can refinance a mortgage if interest rates do drop in the future. If you’re ready to buy a house, have shopped around for a loan that offers good rates and terms for you, then you might just be ready to move forward. Waiting around for a lower rate that may or may not come can be highly risky and may result in you losing a potential home.
You should always spend the amount you’re approved for.
While a lender’s estimate can determine what you can afford, it’s ultimately up to you to figure out how much to spend.
When the lender is determining the amount, terms and rate of the loan they will offer you, they take into account much of your financial situation — but not necessarily all of it. Here’s what they’ll see:
What a lender doesn't see is your other expenses, including your retirement savings, kids’ college savings, and health insurance premiums. Without knowing your entire financial picture, lenders can only provide a good estimate of how much house you can afford.
It comes down to what you're financially comfortable with and fits into your budget — which may not be the same amount your lender approves.
You pay a penalty for prepaying your mortgage.
A prepayment penalty is a fee that the borrower has to pay if they pay off or pay extra on their mortgage within a certain time frame. Prepayment penalties used to be more common than they are now. These days, not all lenders charge these fees.
You should ask about a prepayment penalty when shopping for a mortgage loan. You may even be able to negotiate on having this fee waived.
If your lender does require a prepayment penalty, know that many times these fees only apply for a few initial years, after which you’re free to pay off the loan as quickly as you want.
At Lafayette Federal Credit UnionOpens in New Window, we’re committed to helping you find the right mortgage financing for the property you’re looking to buy, even if you’re limited with upfront funds. We can help you explore the different financing options that may be available to you.
As a member of Lafayette Federal, we offer up to 100% financing options. Additionally, you’ll enjoy our Peace of Mind Purchase Lock, which locks in interest rates for up to 120 days once you’re preapproved. You’ll also get access to our 30-day Close Guarantee with a $250 closing cost credit (up to $2,000) for each day it takes to close beyond 30 days. Also, you’ll get competitive rates, up to 100% financing options, nationwide financing, loans up to $3,000,000, and money-saving discounts.
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