As you likely already know, getting a mortgage is arguably the most important step in the homeownership process. Whether you’re buying your first home or your fifth, securing a mortgage will be one of the biggest parts of the experience. Unfortunately, there are a lot of misconceptions about mortgages and what borrowers should do or expect during the process. Before you start shopping around for a mortgage, take a moment to review these common mortgage myths. Do any of them sound familiar to you?
1. A prequalification guarantees you a mortgage
One of the biggest misconceptions about mortgages is that a prequalification guarantees you a mortgage. A prequalification isn’t the same as a mortgage approval, and it doesn’t promise you anything. A prequalification simply means a lender has reviewed your credit, assets, any debts you have, and your financial history as a whole. Based on those factors, you are given an estimate for the mortgage you might be eligible for at that time. If your situation changes, a lender might reconsider you as an applicant.
Of course, a prequalification is still a good sign you’re on the right track for a mortgage. It’s important to maintain your financial situation as best as you can from that point on. Try not to increase your spending or debts, change jobs, or make any other financial adjustments at this time. Any major changes that affect your finances will impact your prequalification. You also don’t need to commit to the lender who prequalified you. If you find another lender who better suits your needs, that’s fine! Prequalifications are typically considered “soft” inquiries, meaning they don’t impact your credit score, so you don’t need to worry if you end up visiting multiple lenders.
2. You cannot have any existing debts
If only people who were 100 per cent debt-free could buy houses, we would have very few homeowners. You have other parts of your life to pay for, but that doesn’t mean you can’t also secure a mortgage. Student loans, car loans, and credit cards are all common forms of debt, but none of them are deal breakers. The important thing is to show you’re making steady, consistent payments to lower these debts and that you have them under control. Ideally, you also have a lengthy history of making your payments on time, but different lenders may have different requirements. A lender will be most concerned if you’re drowning in those debts.
3. Going directly to the bank is the best route
Banks are the most traditional form of lenders, and you might think your own bank is your best bet for securing a mortgage. Since you’re a loyal customer, they’re likely to give you the best deal, right? Unfortunately, this is another one of the biggest misconceptions about mortgages. Banks don’t show much favouritism when providing loans, and they don’t necessarily offer the best rates, either. Banks also tend to be inflexible in terms of the credit scores and employment type they will accept.
Seeing a broker is your best path to securing a mortgage, since they connect you with various lenders, rather than just one. They also give you unbiased advice about your situation and the kind of mortgage product and rate you can expect. Banks are more biased and want to sell their own products, but a professional like a broker works with your best interests in mind.
4. Down payments – 20 per cent or nothing
Many people have misconceptions about the down payment requirements they need to fulfill. People frequently assume they need a 20 per cent down payment, since this number is most often considered the “ideal” amount. However, you can often get a mortgage with as little as five per cent down, with some conditions. Any down payment under 20 per cent requires the purchase of mortgage insurance. This insurance protects the lender in case of a default, and these premiums are rolled into your mortgage. This allows homeowners with smaller down payments to still secure a mortgage and buy a home.
Keep in mind that for homes over $1 million, you must have that 20 per cent down payment. Apart from these situations, you usually have options for smaller down payments.
5. You can pay it off early, however you want
You can often find ways to pay your mortgage off early, but this depends on the terms in your contract. You can’t just make huge payments whenever you want. If your contract has a prepayment privilege, you may be able to make bigger payments, or pay more often. However, if you do this without the prepayment privilege, you face a prepayment penalty. Lenders make money off interest, and paying your mortgage off early means reducing the interest you pay over time. Prepayment penalties exist so lenders don’t lose too much money from early payments. Even within the prepayment privilege, there are usually limits to how much more you can pay. Plus, once you increase your payment limit, you may not be able to lower it again.
Mortgages are a complex part of the real estate industry, but you should toss these misconceptions about mortgages out the window before you enter the market. Understanding the requirements and the process for a mortgage will make your experience much easier and way less stressful.
If you have any questions about getting a mortgage, get in touch with me!