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The homebuying process has a reputation for being stressful. In fact, 44% of first-time homebuyers surveyed by Homes.com in 2018 said they felt nervous throughout the entire process. From ensuring your credit score is high enough to saving up an adequate down payment, there are plenty of financial requirements that can scare off would-be buyers from taking the leap.
Despite the stress that can go hand in hand with buying a home, mortgage debt in the U.S. reached record highs in 2020. What's more, the average FICO® Score☉ among mortgage holders is on the rise, according to Experian data. U.S. consumers are indeed buying homes, despite all the perceived hurdles.
But some of those perceptions are just that—impressions not necessarily based in reality. Knowing what to expect and how to deal with potential stumbling blocks can reduce stress, especially if it's your first time buying a house. Let's take a closer look at some common homebuying myths that may be holding you back.
Myth #1: I Have Too Much Debt
Before a mortgage lender gives their stamp of approval, they'll want to make sure your monthly budget can easily absorb your new mortgage payment. They rely on something called your debt-to-income ratio (DTI) to help make this determination. DTI is a snapshot of how much of your monthly income goes toward debt payments, such as student loans, credit cards, personal loans and auto loans.
Some potential homebuyers may be afraid they have too much debt to qualify for a mortgage—but your debt on its own isn't the most important detail: It's how it relates to your income that matters. If your monthly income allows you to easily pay your debts with plenty left over, a high amount of debt may not be a dealbreaker. That's where DTI comes in.
To calculate your DTI, tally up all your monthly debt payments and divide the total by your gross monthly income before taxes (not your take-home pay). Multiply that final number by 100 to see your DTI ratio expressed as a percentage. If yours is under 43%, it may be low enough to qualify for a mortgage, though some lenders prefer a DTI as low as 36%. If your DTI tops 43%, see if it's possible to pay down credit cards or other debts to help you qualify.
Myth #2: I Don't Make Enough Money
The general rule for most conventional mortgage loans is that you must keep your new monthly housing costs under 28% of your gross monthly income. This includes your monthly loan principal and interest, plus property taxes, homeowners insurance and mortgage insurance if necessary. For example, if you and your spouse each earn $6,000 per month (before taxes) and are applying for a mortgage together, your monthly payment will likely need to be below $3,360 to qualify.
Keep in mind, though, that your down payment will also be a big factor. If you've been saving for several years and have a sizable down payment, that will reduce the size of the mortgage you need—as well as your monthly payment. This can help you stay under the 28% limit.
Getting preapproved for a mortgage can be a great first step for homebuyers as it can help clarify how much home you can actually afford. If preapproved, you'll receive a letter that states the amount of money you're authorized to borrow to buy a home. It's not a guarantee—you'll still need to complete a formal mortgage application—but it can help shape your budget so that you only look at homes that are within your price range.
Myth #3: My Credit Score Is Too Low
You can expect mortgage lenders to pull your credit report during the application process.
Your recent credit applications, payment history, credit usage and any delinquent accounts you may have will all carry weight in their lending decision. They'll also zero in on your FICO® Score. Generally speaking, a higher FICO® Score opens the door to lower interest rates and better borrowing terms.
Even so, you don't need perfect credit to qualify for a mortgage. Remember, lenders are looking at your overall financial picture—not just your standalone credit score. This includes your debts, income, assets, down payment amount and loan amount.
There isn't one set-in-stone minimum credit score to get a mortgage because every lender is different. The type of loan you apply for also plays an important role. The minimum FICO® Score for a conventional mortgage is generally around 620; however, some government-backed loans have lower credit score requirements.
| Minimum FICO® Score Requirements by Mortgage Type | |
|---|---|
| Mortgage Type | Minimum FICO® Score |
| Conventional loan | 620, though some lenders require 660 or above |
| FHA loan | 500 with a 10% down payment; 580 with a 3.5% or higher down payment |
| VA loan | No set minimum, but lenders typically require a FICO® Score of 620 or higher |
| USDA loan | No set minimum, but lenders typically require a FICO® Score of 640 or higher |
| Freddie Mac Home Possible loan | 660, though some borrowers who don't have a usable credit score may also be considered |
Regardless of loan type, it's always best to improve your credit as much as possible before trying to get a mortgage. Doing so can increase your odds of getting approved with the best rates and terms. This, in turn, could end up saving you thousands of dollars over the life of the loan. In some instances, taking a few months to pay down your credit card debt can be enough to increase your score and help you qualify for a more affordable mortgage.
Myth #4: I Don't Have Enough for a Down Payment
One of the biggest homebuying myths is that you have to have a 20% down payment. If you have great credit and a reliable source of income, you could qualify for a conventional loan with as little as 3% down. Similarly, qualified borrowers can take out an FHA loan with just 3.5% down. VA loans and USDA loans require no down payment at all.
Just keep in mind that you'll likely have to pay for private mortgage insurance (PMI) until you've acquired 20% equity in your home, which will increase your monthly mortgage payment. With a conventional loan, PMI can cost anywhere from 0.5% to 2% of the total loan amount. FHA loans charge an upfront premium of 1.75%, plus an annual premium of 0.45% to 1.05% that's broken down and paid on a monthly basis.
Myth #5: Closing Costs Will Be Outrageous
It's easy for potential homebuyers to get bogged down in all the fees that come with taking out a mortgage. Closing costs vary from lender to lender, but often include charges like the appraisal fee, home inspection fee, loan origination fee and application fee, among other things. You may also be on the hook for charges related to preparing documents, securing title insurance and running your credit.
Overall, closing costs generally total anywhere from 2% to 5% of the home sale price. They're paid at the very end (at the "closing table") when signing all the final home sale documents. Spending 5% on fees alone may give you sticker shock, but again, that may not be your actual total. To be safe, it's best to save up that amount right alongside your down payment if possible. If you end up spending less in the end, think of it as extra money you can put toward other financial goals.
The Bottom Line
While buying a home is certainly a huge financial step, it's also a goal that may be more attainable than you might think. The stronger your credit, the better your odds of getting approved. You can check your credit report and credit score for free with Experian so that there are no surprises when you're ready to fill out a mortgage application.