Busting Mortgage Myths: 8 Truths Most First-Time Homebuyers Don’t Know

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The word “mortgage” stems from Latin, and literally translates to “death pledge.” Yikes.

In reality, mortgages are one of the most magical financial products you can sign up for. It’s a safe and relatively simple way to borrow a (very) large sum of money with the potential to unlock wealth for you and your family. Not to mention, have a home of your own to live in.

Successfully saving for and buying your first house isn’t easy, that’s true. But a “mortgage” is not as daunting, risky, or scary as it sounds – it’s actually pretty awesome.

Let’s clear up 8 mortgage myths that commonly confuse first-time homebuyers:
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Myth #1: Your mortgage interest rate is all that matters.

Truth: Look beyond the interest rate to figure out the true cost of your mortgage.

Don’t shop around for a mortgage by comparing interest rates alone. Otherwise, you may not end up with the best deal.

Here’s a secret about mortgage interest rates: they’re always offered in eighths. Example: 4.125%, 6.5%, 5.85%.

If you see a rate advertised as 4.99% or 5.86%, that’s the APR (annual percentage rate), which factors in the cost of obtaining the loan, i.e. fees that make the all-in price go up. That APR number is the number to compare in shopping for the best deal, because it factors in fees you pay the lender (and every lender charges different fees).

Here are some of the fees you’ll run into in the mortgage application and approval process (some of these the lender controls, and some they don’t): ‍

• Application fee: a cost charged by lenders to process your application, though not all lenders charge one. Some that do charge up to $500.
• Credit report fee: this is typically less than $30, but still a cost to consider.
• Appraisal fee: most lenders require an appraisal in order to issue a mortgage, and you’ll have to pay a few hundred dollars for this service.
• Underwriting fee: lenders also call this an origination fee, and it’s charged as a percentage of the total amount you’re borrowing. It covers all the work to prepare and issue your mortgage.

Long story short: there are more costs associated with a mortgage than just the interest you pay on your monthly payment.

Pay attention to how different lenders put together your estimated fees and mortgage closing costs in your loan estimate – this can help you make sure you’re actually getting the best mortgage available to you.
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Myth #2: Mortgage lenders look at the same credit score as other lenders.

Truth: Mortgage lenders look at a specific version of your credit score.

There are at least a dozen different types of credit scores and scoring models, and each serves a different primary purpose.

Applying for a credit card? They’ll check your FICO 8 score.

Using Credit Karma to monitor your profile? That’s a VantageScore 3.0.

When you apply for a mortgage, almost all lenders use FICO scores 2, 4, and 5 (together, the mortgage credit score). These scores are similar to, but fundamentally different from, a VantageScore or even a FICO 8.

The mortgage credit score is specifically designed to help lenders underwrite mortgages. Before you start a mortgage application, make sure you understand and track the right score so you’re prepared. This will put you in the best position to get approved and save money on your mortgage.

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Myth #3: Your down payment has to come from your personal savings.

Truth: You can creatively fund your down payment.

Getting together enough money to make homeowner status a reality is probably your biggest mortgage hurdle.

Bad news: you can’t get a loan, use a credit card cash advance to fund your down payment.

Good news: there are plenty of other creative ways to get the cash together!

First off, keep in mind that the average down payment for first-time homebuyers in 2021 was only 6% of the purchase price of the house.

Set the right savings target, and then consider these potential sources of funds:

• Borrow from your 401k or IRA: to fund a down payment, you are able to borrow up to $50,000 from your 401k, or half the value of your account (whichever is the smaller figure). While you’ll be required to pay interest, you won’t have to pay taxes, as long as you pay it all back on time.
• Sell a vehicle: working remotely? Could you switch to a cheaper, older car? Selling a vehicle may be a good way to get a few thousands dollars in your pocket, and potentially save on car payments in your monthly budget.
• Ask for house fund contributions: you can use gift money to fund your down payment! Instead of creating a wedding or baby registry, why not ask for money towards your future home? It’s a great way to build your savings nest egg fast.
• Sell your crypto: can you liquidate some of your crypto holding or stocks and put the cash towards your first real estate purchase? Watch out for taxes, but it could be a good way to bump up your down payment fast.

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Myth #4: You should take whatever mortgage you can get – from any lender that will approve you.

Truth: You can shop around – you’re in control.

While it might feel intimidating to apply for a mortgage, remember: lenders want your business. You are in the driver’s seat.

75% of mortgage loan applicants only submit an application with one lender. Half of consumers don’t even shop around at all for lower interest rates before applying, but borrowers that get just one additional rate quote see average savings of $1,500 over the life of the loan.

We recommend you talk to at least two different lenders before you make a decision on which one you’d like to use to purchase your home. Using Gravy, get matched directly to lenders we’ve pre-vetted and rated based on how they treat first-time homebuyers.
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Myth #5: A mortgage is a major commitment.

Truth: You’re not stuck with one mortgage (or one house) forever.

One of the reasons many first-time homebuyers view the mortgage process as intimidating is the length of the loan. It’s not like a 5-year car loan – it’s a 30-year commitment.

But keep this in mind: the average length of time homeowners stay in their homes is only 13 years.

If you’re nervous about signing up for a three-decade long payment, remember, you have two options:

• You can always refinance. If rates drop, or if your balance simply gets smaller and you’d rather pay it off sooner, you can always trade your current mortgage in for a different rate and term.
• You can always move! That’s right – if homeownership isn’t for you, you’re not stuck making payments forever. Wait for the market to appreciate a bit, then sell and recapture your equity. Whether you’d rather rent, you need more space, or you’re ready to relocate, selling is always an option.
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Myth #6: Lenders will judge you based on your financial past.

Truth: Great lenders are the least judgmental people you’ll ever meet.

Mortgage lenders have literally seen it all when it comes to financial histories. So if you’re worried they’re going to judge you, think again.

Lenders are in the business of helping create more homeowners – they want to help, and they are your ally in the process. You have the same goal. With the right lender partner, getting a mortgage could be easier than you ever imagined.

And what’s the worst that could happen? If you don’t click with a lender, and you don’t find a deal you like on a mortgage, you can move on. There is no risk to you.
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Myth #7: Get pre-qualified, and you’re good to go.

Truth: Getting prequalified doesn’t mean much – get pre-approved to show you’re serious.

When you first talk to a mortgage lender, you’ll go through a pre-qualifcation process. This is when you and the lender figure out your home buying budget based on self-reported income and credit information.

Pre-qualification is always a good first step, because it sets the stage for how much house you can buy, and how much you’ll roughly expect to pay in a monthly mortgage payment.

However, pre-qualification doesn’t help you much when it comes time to actually tour houses and start to put together offers with your realtor.

Pre-approval status is when you make it official, and fill out a mortgage application, which is then checked and verified by your lender. A mortgage pre-approval is essential for helping you move fast when you find the house that is most definitely “the one” – potential sellers aren’t going to take your pre-qualification seriously, because it’s only based on self-reported data.

If you’re serious, you can show your high intent to buy with a pre-approval letter.
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Myth #8: It takes years to prepare for a mortgage application.

Truth: You can get “mortgage-ready” faster than you might think.

And lenders only care about three very specific factors:

• Your income: how much do you make? Is it consistent?
• Your credit: what is your mortgage credit score? Do you pay your bills on time?
• Your equity: how much do you have saved for a down payment?

One of the best ways to prepare for your first conversation with a lender is to use Gravy+ to monitor your mortgage credit score so no surprises come up in the application process.

You can also use Gravy to set up a down payment savings account and earn rewards when you pay your rent each month.

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