A new survey from Zillow revealed that prospective home buyers may be “ill-prepared to take out a mortgage,” with basic mortgage questions answered incorrectly nearly one-third of the time.
For example, 34% of prospective buyers indicated that they weren’t aware you could get a mortgage with a down payment of less than five percent.
Zillow countered this myth by noting that loan requests with down payments between 3.5% and 5% have risen 570% over the past two years in the Zillow Mortgage Marketplace.
There are indeed options for those putting down less than five percent, including FHA loans, which only require 3.5% if your credit score is 580 or higher, and also specialty programs, such as Fannie Mae Homepath, which requires just 3% down.
Of course, with the housing market white-hot these days, you’ll be hard pressed to get your offer accepted if you’re only able to put down five percent or less.
A large down payment can separate you from the crowd if there are multiple offers, so it’s not always wise to put down as little as possible.
At the same time, a low down payment can raise your mortgage payment in three different ways, making life more difficult assuming you land the house.
Zillow also found that a quarter (26%) of buyers believe they must close their loan with the bank that pre-approved them. Again, not true, regardless of the scare tactics employed.
Often, a seller will have a preferred lender that they want you to get pre-approved with, but you’re under no obligation to use them. However, getting the pre-approval is a sign of good faith if you’re serious about getting your offer accepted. You can switch lenders after the fact…
24% Believe Best Mortgage Rates Are With Banks
Meanwhile, roughly a quarter of respondents looking to buy indicated to Zillow that the best mortgage rates and fees can be found with banks they currently do business with.
Again, this isn’t necessarily true, though it could be. Your bank may or may not have the best deal, and the only way you’ll know for sure is to shop around.
Most consumers only bother to obtain a single mortgage quote, which can result in thousands of lost dollars over the years.
Learn more about effective mortgage rate shopping to ensure you get your hands on the rate you deserve.
Even those who already have a mortgage lack basic understanding. For example, one in five of these respondents didn’t know you could refinance if underwater.
If you’re one of these people, there is a program called HARP that allows borrowers to refinance, regardless of loan-to-value ratio. Homeowners with FHA loans can also execute a streamline refinance without LTV constraints.
This means there could be millions of untapped HARP refinances, which is good news for loan originators bracing for a slowdown in refinance activity this year.
Finally, about half (47%) of current homeowners surveyed believe you must wait a year between refinancing.
Once again, this is a myth – you can pretty much serially refinance if you want to, though some loans contain prepayment penalties that will cost borrowers.
And it doesn’t always make sense to refinance. Make sure you do the math first to determine if it’ll actually save you some money.
After all, you won’t want to spend a ton of money refinancing, only to sell your property a year or two later. If you’re serious about paying off the mortgage, it may make more sense to refinance to a lower rate.
For those who are considering selling in the near future, refinancing could be a losing proposition.
More survey takeaways:
- 34% of prospective home buyers don’t know what the term APR means
- 50% of prospective home buyers don’t know mortgage rates change daily
- 31% of current homeowners wrongly believe you must wait seven years after short sale or foreclosure to buy again
Don’t Blame Consumers for Mortgage Confusion
While some of these stats may seem alarming, you can’t really blame consumers for their naïve understanding of mortgages.
As I always say, mortgages are very complicated, even for the experts. Additionally, the landscape is always changing, so what’s true today may be wrong tomorrow.
If guidelines were set in stone, it’d be a lot easier to navigate the mortgage market, but they’re not. Rules also vary by bank, thanks to lender overlays and product niche.
[See: Why every lender will disappoint you for more on that.]
For these reasons, you really need to “put in the time” when going about getting your mortgage. Don’t rush it.
It’s probably one the biggest financial decisions you can make, so do your homework and shop around. Or simply regret not doing so after the fact.