First-Time Buyer Myths That Cost Real Money

The biggest myth I hear is that you have to be perfect to buy a home. You don’t. Underwriting follows written rules, and if you know them, you can plan around them. These are the myths that cost first-time buyers real money, and what the actual rules say.

Myth 1: You need 20% down

You don’t. Fannie Mae’s 97% loan-to-value options allow a minimum down payment of 3%. HomeReady, one of those options, has no first-time buyer requirement. A standard 97% purchase needs at least one first-time buyer on the loan. The CFPB says FHA loans allow down payments as low as 3.5%. Gifts and grants can cover the down payment and closing costs on some conventional programs.

Here’s the math on a hypothetical $350,000 home. It’s an illustration, not a loan I’m offering.

• 20% down is $70,000.
• 3.5% down is $12,250.
• 3% down is $10,500.

Waiting years to save $70,000 can cost you more than the mortgage insurance would. Veterans have another option, and nearly 90% of VA-backed loans are made with no down payment, according to VA. See my FHA loan page and down payment assistance page for the options.

Myth 2: You need perfect credit

You don’t. The CFPB says FHA loans allow lower credit scores than most conventional loans. A higher score still helps, because it can lower your cost, but there isn’t one magic number. I explain how scores affect pricing in Credit Score and Mortgage Pricing: What Moves the Needle.

Myth 3: The lowest rate is the best loan

It isn’t. A low rate with expensive mortgage insurance can cost more each month than a slightly higher rate without it. Ask for the total monthly payment: principal, interest, taxes, insurance and mortgage insurance. Compare those, not the headline rate. Fannie Mae’s HomeReady loans at 97% loan-to-value call for 25% mortgage insurance coverage, and the coverage level is one of the things that drives the monthly cost, so ask what it is on your quote.

Myth 4: A pre-approval means you’re approved

It doesn’t, and this one hurts the most. A pre-approval can be issued from a credit pull and numbers you typed in. Underwriting hasn’t verified anything yet.

This is a hypothetical, but it’s a pattern I see a lot. A buyer gets a quick pre-approval online, makes an offer, and two or three weeks into escrow, underwriting reads the paperwork and finds the numbers don’t match. Now there’s a deadline and no easy answer. Ask whoever pre-approves you whether your income, assets and credit were actually reviewed, or only entered.

Myth 5: You have to pay off all your debt first

Not necessarily. Lenders look at your debt-to-income ratio, which is your monthly debts divided by your monthly income. Paying down a card can help, but emptying your savings to do it can hurt you, because you need cash for the down payment and closing costs. Run the numbers before you decide. My affordability calculator is a good first step.

Myth 6: You have to use the lender who pre-approved you

You don’t. You’re free to shop. A mortgage broker can compare programs from a wide network of lenders for you, which is often easier than calling banks one at a time. Keep your credit inquiries within a short period and ask your loan officer how they’re counted.

What to do before you start house hunting

1. Decide your cash: down payment, closing costs and a cushion.
2. Pull your credit reports and fix errors before you apply.
3. Ask for a full review, not just a quick pre-approval.
4. Compare total monthly payments, not only rates.
5. Don’t open new credit or make large purchases while you’re shopping.
6. Ask about down payment help in your state or county.

I’m a mortgage broker with NEXA Lending, and I work with borrowers in all nine states where I’m licensed (CA, CO, TX, FL, GA, NC, SC, TN, VA). As a broker, I can shop your loan across a wide network of lenders instead of being stuck with one bank’s programs. Programs, rates and approval depend on your full file, and individual rates vary.

Sources: Fannie Mae, 97% LTV Options FAQ (opens in a new tab), CFPB, FHA loans (opens in a new tab), VA, Home Loans (opens in a new tab).