January is a great time to start thinking about what it takes to buy your first home. But even the best-prepared buyers are saddled with misconceptions. Here are five common myths many first-time homebuyers make the mistake believing.
No, you don’t need a credit score of 750
People think their credit score needs to be higher than it is. Obviously, you get better rates if your credit is higher, but it doesn’t necessarily mean you can’t finance a home if it isn’t.
Keep in mind that some lenders use credit repair software that gives you a blueprint of what to do to fix your credit quickly. They can improve your score by 20 or 30 points in just a few months. Sometimes small fixes like reducing your overall credit card debt can make a big impact.
We’ve been able to get an FHA (Federal Housing Administration) loan for buyers with a credit score as low as 580; for conventional loans, 620.
You don’t need to put down 20 percent
First-time buyers hear that constantly, so that means we hear it constantly! In reality, that 20- percent downpayment removes the private mortgage insurance buyers are otherwise required to pay for. That’s great, of course, but not required. For conventional loans, the minimum downpayment is actually 3 percent.
You can’t use cash for a downpayment
Some people work in cash- dominated industries, think servers, for example. Some people have really generous family members. But banks want to see that money in an account for at least two months before you go to use it.
Even then, you’ll have to ‘source’ the money. That means being able to explain where it came from. That includes people paying you back for outstanding loans. A gift from a family member requires a gift letter. It sounds weird, but it tells lenders that the money was gifted and not expected to be paid back.
Don’t quit your day job
If you’re thinking about breaking away and starting your own company, be aware that lenders might be skittish if you don’t have a year or two of proven income. In other words, you might want to stick with your current employer until after you buy the home.
Don’t make big purchases
This one really trips up first-time homebuyers. Any new debt can really upset the closing process. Wait until you’ve got the home before you start buying new furniture for it!