Busted: 5 Mortgage Myths

BOSTON (TheStreet) — Do you think historically low mortgage rates guarantee the cheapest home loan ever? Think again. Here are five common mortgage myths and the sobering reality.

No. 5. Myth: 620 is the magic credit score.

When evaluating loan applicants, lenders pull credit scores from the three major reporting agencies — Equifax (EFX) (Stock Quote: EFX), Transunion and Experian (EXPN.L) — and use the middle score to gauge eligibility. Indeed, 620 is considered the minimum eligible score, but it behooves applicants to aim higher to avoid paying more. Thanks to loan-level adjustments from Fannie Mae (FNM) (Stock Quote: FNM) and Freddie Mac (FRE) (Stock Quote: FRE), a 620 —or even a 680 — may result in additional fees. The adjustments get looped into the mortgage rates, which raises monthly payments.

Someone with a 679 credit score, who puts a 20% down payment on a $500,000 house, will end up paying about $11,000 in additional fees, compared with someone who has a score in the high 700s, according to Joe Heisler, president of the New Jersey Association of Mortgage Brokers.

(EFX) (EXPN.L) (FNM) (FRE) No. 4. Myth: Once the bank initially approves your credit, you're home free and guaranteed a mortgage loan.

Not so fast. Under new "Loan Quality Initiative" programs from Fannie Mae, as of June 1, lenders must make sure an applicant's credit doesn't change between application and closing. This means that even after an initial approval, banks may pull the applicant's credit again, at the last minute, as few as five days before closing. If the credit has changed significantly for the worse, the bank may refuse to issue the loan, at the 11th hour — in which case the sale of the house will fall through. Caveat emptor: To ensure a credit score doesn't drop between the first check and the last one, don't finance a bunch of new furniture to decorate a new house before the closing.

(EFX) (EXPN.L) (FNM) (FRE) No. 3. Myth: But for those with stellar credit scores, mortgage rates — and monthly payments —are historically low.

Not if you're buying a condo. Buyers without a minimum 25% down payment may have to pay additional closing-cost fees equal to 0.75% of the loan, regardless of credit score, under rules that took effect last year. Those fees are often rolled into the mortgage, which raises monthly payments.

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