NEW YORK (MainStreet) The fact is, buying a home today is absolutely, totally different from buying one in 2003. And right there is why so many myths swirl around a process that, in many ways, is utterly novel from what it has been. What was true isn't anymore.
Be ready to be shocked as we bust some myths below.
Myth 1: You need a 20% downpayment even to think about buying a home, and that means maybe a couple hundred thousand in cash for a would be Manhattan apartment hunter.
Totally false. "A down payment can be very low," said Joe Parsons, senior loan officer with PFS Funding, a mortgage banker in Dublin, Calif. "There are conventional loans requiring just 3% for a down payment or even zero - the VA home loan program for veterans will cover 100% of the purchase price."
Maybe five years ago, in the belly of the beast of the mortgage meltdown, 20% was in fact a necessity, but today most lenders are way more flexible. And if yours isn't, go elsewhere.
Myth 2: Only those with golden credit need apply for home mortgages.
Rubbish. The past half dozen years have been rough. High unemployment, a housing implosion, you know the realities. So do lenders, and an upshot is a heightened willingness to overlook past pecadilloes such as a foreclosure.
"Credit dings and blemishes, even a bankruptcy, short sale or foreclosure do not prevent you from getting a loan, even with a very low down payment such as 3.5% for an FHA loan," said Bruce Ailion, a realtor with RE/MAX in Georgia.
A new FHA initiative called "Back to Work" explicitly cuts the time to qualify for a new mortgage after a foreclosure, bankruptcy or similar to as little as one year for borrowers who can prove their past financial difficulties were due to extenuating circumstances out of their control.
Myth 3: Fixed rate mortgages are the only way to go.
Not true, said David Reiss, a professor at Brooklyn Law School who specializes in real estate. He elaborated: "The necessity of getting a 30-year fixed rate mortgage is one of the biggest myths about homebuying. The average American household stays in their home for about seven years. Typically, 30-year fixed rate mortgages have higher interest rates than adjustable rate mortgages (ARMs). Homebuyers should take a hard look at their plans for the new home."
Only 6.5% of applications for mortgages in a recent period were for ARMs, according to the Mortgage Bankers Association. A typical ARM went out at 3.21% interest, versus 4.69% for a typical 30 year fixed rate. That adds up to a difference worth tens of thousands of dollars over, say, a seven year probable life of the loan.
Do the math.
Myth 4: Cut out the realtor, rep yourself and you will save a fast 3%.
That is just about never true.
The realtor's commission - 5 or 6 % in most of the country - is paid by the seller. In most contracts that realtor agrees to "co-broke," which means he or she will split his commission with a buyer's agent.
Explained Sam DeBord, a broker with Coldwell Banker Danforth in Washington State: "Most listing agents sign a contract with the seller for a certain commission percentage - for example, 6%. They offer to share a portion of that if a cooperating buyer's agent enters the picture - for example, 3% - but if there is no buyer's agent involved, the full 6% is still paid by the seller to the listing agent."
The buyer has absolutely no say in this, at least in theory.
Could a tenacious and persuasive buyer negotiate, say, a 1% cut in the selling price by self representing? Probably.
But saving the full 3% just isn't going to happen, said multiple sources.
Myth 5: If you can, you should buy a home right now.
Very probably homes will be a strong investment over the next 10 to 20 years, mainly because in most markets prices have been savaged compared to 2005 through 2007 highs. What goes down goes up and the same will be true with housing.
However there are plenty of reasons why renting is the better choice for many. It's flexible. There's little commitment. Take a new job in a different part of the country, and it's usually easy and low cost to move on.
There also is no knowing how long recovery will take for housing where you live, and in some parts of the nation, experts predict it will be another 20 years before the 2006 highs are hit again.
"Just because you can afford to buy a home, doesn't mean you should," said Steven Alexander, the president of Private Mortgage Services, a division of Private Bank of Buckhead in Atlanta. "There are many factors that need to be considered before making that type of commitment. Do I have the time and financial wherewithal to maintain a home? How long do I plan to stay?"
Home buying makes sense. Often. But it is not a financial fast track to wealth. Know that, and the decisionmaking gets that much easier.
--Written by Robert McGarvey for MainStreet