Whether buying a house is a future goal or you’re already actively shopping your local housing market, home buying is a big deal. It's a decision you want to get right. Here are seven of the most common myths and misconceptions regarding house buying. Take a peek below before you start signing any important paperwork…
1. You always have to come up with at least 20 percent for the down payment when buying a house.
Twenty percent is a fairly standard down payment requirement for many mortgages these days, and the more you can put down on a home the better chance you have of qualifying for the loan. It also bumps up your odds of scoring better interest rates and saving yourself a significant amount of money over the life of the loan. But if you stop and do the math, 20 percent (or more) of the price of a home in today’s market…well let’s just say it’s a big number.
So why is 20 percent such a common down payment? Well, by putting less than that amount down there are some additional considerations to keep in mind. Here’s the downside of putting down less than 20 percent:
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With less than 20 percent down on a conventional loan, you’ll pay Private Mortgage Insurance (PMI) until the PMI is terminated, canceled, or you reach the midpoint of your loan.
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With less than 20 percent down on an FHA loan, you’ll pay a required Mortgage Insurance Premium (MIP) potentially for the full life of the loan.
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Both PMI and MIP are usually tacked on to your monthly mortgage payment and can be significant costs (around 0.5 percent to 1 percent of the loan amount). You can find out much more detail on these costs here if you’re interested.
There are many mortgage options that do not require 20 percent down such as conventional loans and FHA loans. While they do have other pros and cons to consider, they have minimum down payment requirements starting at 3% on a conventional loan and 3.5% on an FHA loan. If you’re active-duty military or buying rurally, you might be a match for either VA or USDA loans, which may not require a down payment.
2. The down payment is the only cash you need upfront.
Don’t sink all of your cash into your down payment! You may also need to cover closing costs out of pocket, which usually includes an initial escrow payment, origination fees, recording fees, title fees, and more. You may also have moving costs or need to set up a savings account for home improvement and repair.
3. You should find a house before applying for a loan.
Depending on current market conditions, buying a house can be a very intense process. As you race to put in your offer before other buyers and then receive a counter-offer from the seller, you never know what will happen. Getting a preapproval letter before house shopping will do two helpful things for you: 1) Gives you the house price range that you are qualified for 2) Enables you to confidently sign a purchase agreement and put earnest money down.
You could find the house first and do financing after, but you’re risking losing out to another buyer who was prepared with a home loan and was able to make an offer before you.
4. You need perfect credit to buy a house.
An impressive credit score may help you get a lower interest rate, but a spotless credit history isn't always necessary for qualification. Many lenders will require a credit score of at least 640 for a borrower to qualify for a conventional or USDA mortgage loan. FHA loans can get approved with credit scores starting at 580.
Discover your maximum house-hunting budget with our free guide:
How Much House Can I Afford in Oregon?
5. You’ll get a big tax break when you buy a house.
People often think that if they take out a large mortgage, they’ll reap enough benefits from the tax deductions to make it worth it. However, there are limits to how much the IRS will allow you to deduct. These are based on whether you’re filing as an individual, a married couple filing jointly, or a head of household.
In 2019 (and today), this limit was set at interest on qualifying mortgages with a principal balance of up to $750,000. To benefit from tax deductions on mortgage interest, you’d have to pay more than the standard deduction annually. Be sure to speak with an experienced tax advisor to determine the amount you would be able to deduct, and whether it’s worth it to itemize your return for mortgage interest purposes.
6. Fixer-uppers cost less.
Even if you are experienced enough to handle most repairs yourself, fixer-uppers can cost much more than you anticipate. A low initial home cost may be tempting, but then to be safe, factor in a higher estimate on repairs and updates needed. Is the house livable before these repairs/updates are finished? How will you finance those expenses?
A house may cost you $85,000 to buy but could take over $100,000 to renovate before it’s livable.
7. Buying a house is always a good investment.
Yes, real estate values indeed tend to increase over time. It’s often a low-risk, low-cost investment option for many folks, but not everyone. For example, if you’re on a temporary job assignment for 18 months, buying a house is probably not a good investment for you! However, if that job assignment were to be extended another five years, it may now be a good investment for you to buy a home.
The local housing market also impacts whether buying a home at a specific time is a good investment. Speak with an experienced real estate agent where you plan to buy a house to get their perspective.
If you do decide to buy, do your research and make sure you’re getting a fair price for the house and the loan. Plan to remain in the home for a minimum of two to three years (although more conservative estimates say five years is a better minimum to stick to.)
Are you ready to start the home buying process? CCCU is ready to help you find the perfect mortgage to fit your needs. If you’re ready to start your pre-approval or would like to learn more about the home buying process, contact our team today!
If you are buying a house and would like more time and money-saving tips, download our "How Much House Can I Afford in Oregon?" guide.
