Parents are an invaluable source of information for their children, and much of their wisdom stands the test of time. Treat others the way you want to be treated. Dress for the job you want, not the one you are interviewing for. Don’t pet the animals at the zoo.
But some of their “conventional wisdom” about buying a home loses its relevance over time. Many parents of today’s first-time homebuyers haven’t been first-time homebuyers themselves in 30+ years, and a lot has changed since then.
With absolutely no disrespect for the parents of the world, we’ve decided to dispel common homebuying myths your mom and dad might have told you.
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Homebuying myths busted
You need a 20% down payment
This is the granddaddy of all homebuying myths. While putting 20% down has its benefits, there are loan programs that allow 5%, 3.5%, and even 0% down payments.
In fact, according to the National Association of REALTORS®, the median down payment for first-time homebuyers in 2019 was just 6%. And the median down payment for all buyers hasn’t been 20% since 1989, when interest rates were in the double-digits.
If you were facing interest rates between 6-10%, like your parents probably were in the 1990s, you might want to put down 20% to minimize the size of your monthly payments. But in today’s low interest rate environment, you can put down less and keep more of your savings aside for emergencies or housing renovations.
Additionally, saving up for a 20% down payment can take years or decades. With a lower down payment, those years can be spent building home equity and locking in a consistent mortgage payment instead of facing rising rent payments that give you no return on investment.*
You may have heard of the 30-30-30-10 rule of personal finance:
- 30% of monthly income is for housing
- 30% is for necessities
- 30% is for savings, investments, financial goals
- 10% is for fun
This is among the biggest homebuying myths because it’s based on a government standard that is now 40 years old. Student loan debt, wages, and home prices have changed substantially since this baseline was formed.
People with more student loan or credit card debt may be better served by the 28/36 rule, where 28% of monthly income goes to housing and another 8% goes toward debt service, equaling 36% towards both categories.
On the other hand, people with no debt may be comfortable spending more than 30% of their monthly income on housing, especially if they see their home as an investment.
There are also geographical factors. Thirty percent of monthly income for a $70,000 salary is $1,749. That may be sufficient for a mortgage payment in Phoenix, where the median sale price is $410,000. But it won’t go nearly as far in Seattle, where the median sale price is $735,000.
It’s definitely wise to set a budget. But set it based on your unique situation, not a one-size-fits-all formula.
You should use an agent you already know
Myths about real estate agents can seriously hamper the homebuying process.
Everybody has an Aunt Paula that got her real estate license back in 2005. But that doesn’t mean you should use her as your buyer’s agent.
Annie Kemp† of the DiBello Group has 22 years of real estate experience and says hiring a friend or family member as your agent is never a good idea.
“Hire somebody that you can hold accountable if something does go wrong,” Kemp said. “I have turned away business from friends and family. It’s not for my sake, it’s for theirs. A lot of things are assumed between friends and family, which means a lot of things can go wrong during the process.”
There are instances when missteps by the agent warrant legal action, and serving a lawsuit to your Uncle Bob makes for an awkward Thanksgiving.
In addition to avoiding uncomfortable family encounters, your agent is your negotiator and can be the difference between winning a bidding war and starting from scratch.
“Winning a bidding war is agent-specific — it’s one of the things that can set you apart from the competition,” Kemp said. “There are so many variables — the type of sale, the seller’s agent, demographics. A good agent does some detective work to find out how to appeal to their audience.”
Simply put, your friend or family member may not be the most qualified agent for your homebuying needs. And that can be costly at the closing table.
†Kemp served as the author’s real estate agent in 2020.
Beautifully manicured lawns, airtight attics, and scuff-free walls don’t appear overnight — and neither did those grass-stains on your dad’s New Balance Sneakers. Homeownership comes with a never-ending list of chores, projects, and repairs that don’t take care of themselves.
Your parents may have made homeownership look easy, but there is more to it than meets the eye. Be prepared for yard work, regular maintenance, and unexpected repairs, all of which take time, effort, and money.
There are two common ways to estimate your annual home maintenance budget:
- Budget 1% to 4% of your home’s value ($3,000 to $12,000 for a $300,000 home)
- Set aside $1 for each square foot of your property. So if you’ve got a 2,500 square foot home, you’ll want to have at least $2,500 in a maintenance fund.
Keep in mind, these rules vary based on the age and condition of your home. They also do not account for unexpected major repairs, like a furnace going out.
Taking care of your home isn’t just about safety and comfort, it’s about protecting your investment. You can increase the value of your home with regular maintenance and simple updates like paint, new flooring, and new fixtures.
Even with careful upkeep, though, things will break down. Be prepared for surprises by establishing a network of contractors you trust, neighbors, and family members who can help with large projects.
Saving up for a down payment is the biggest barrier to homeownership for many homebuyers. Not only is there the prevailing myth that homebuyers need to put 20% down, there’s also a school of thought that they need to do it all on their own.
That’s simply not true.
Conventional and government loan products — FHA, VA, and USDA — allow gift money to go toward your down payment. Each loan program has its own rules regarding where the gift money comes from and how it’s used, but there are plenty of options for using gift funds to cover your down payment and closing costs.
Even if down payment assistance from family or friends is off the table, most cities, counties, and states have down payment assistance programs. You can look these up via the U.S. Department of Housing and Urban Development (HUD), though this is just a starting point. The HUD list isn’t exhaustive, and there are many programs other than what’s listed there.
After checking out the HUD database, Google “down payment assistance in [your area]”. You may find a range of programs that offer grants, forgivable loans, and other forms of homeownership assistance.
Of course, when it comes to dispelling this myth, we also need to acknowledge the cultural barrier of tough love and rugged American individualism. Some parents may believe you’ll feel greater satisfaction in achieving homeownership by going it alone.
But again, times have changed. Housing prices have skyrocketed in the past year, and many young homebuyers are coping with rising costs of living, student loans, and other financial barriers their parents’ generation may not have dealt with. And it’s not worth missing out on years of building home equity just to say you didn’t ask anyone for help — especially not when help is so readily available.
It’s every homeowner’s nightmare to end up in foreclosure due to an unexpected job loss or medical expense.
While it’s near impossible to prevent disaster from striking, the worst effects can be mitigated with careful planning.
A good start is to establish an emergency fund. The amount in this fund will vary from situation to situation, but three to six months of expenses is generally recommended for debt-free households.
And even if the emergency fund runs dry, foreclosure is not an inevitable outcome. There are loan modification options, many of which are currently enhanced due to COVID-19. And in a strong seller’s market like today’s, homeowners can sell their homes instead of facing foreclosure.
In that case, you can sell the home to repay the loan and use any proceeds left over to purchase a new home when you’re ready. Doing so may allow you to downsize to a place with a more manageable mortgage payment without taking the credit hit of a foreclosure.
Homeownership is full of surprises, and they aren’t always happy ones. But the folksy phrase “happy renter” may be a bit of stretch.
The biggest difference between homeownership and renting is where your monthly payments end up. Each mortgage payment is an investment in your home, which, as an appreciating asset, generally increases in value over time. Not only are homeowners increasing their stake in the property, they’re building wealth through the increasing value of their homes.
Meanwhile, rent payments see no return on investment.
And sure, home repairs can be a pain, but so can landlords. Renters can spend months asking their landlord to fix a broken A/C unit or a water-damaged ceiling, only to get little or no response. Meanwhile, homeowners have the power to address the problem immediately, even if the cost comes out of their pocket.
Finally, the average rent payment is greater than the average mortgage payment in the U.S., according to Redfin.
With a 6% down payment, the average mortgage payment was $1,564 in April 2021, while the average rent payment was $1,736. That leaves homeowners nearly $200 per month or $2,400 per year to spend on maintenance and repairs before they reach the same amount they’d be spending in rent payments.
Never buy a house with a septic tank
As far as homebuying myths go, this one as a bit niche. But you may stumble across it during the home search.
Some homes, especially in rural areas, have a septic tank to process liquid waste instead of hooking up to a city sewer system. These systems require a little extra care, which can be a turn-off to some buyers.
However, in a competitive market, it’s best to keep as many options on the table as possible. Besides, owning a home with a septic tank isn’t the headache it used to be.
Septic care boils down to the following:
- Scheduling yearly maintenance appointments
- Being careful not to flush certain items, such as thick paper towels, feminine products, grease, baby wipes, or chemicals (but you probably shouldn’t be flushing those anyway, because they can cause back-ups in city sewer lines as well)
- Considering the landscaping around the septic tank itself since you, and the maintenance crew, will need access to it
Altogether, it’s not a ton of additional work for the homeowner and probably not worth writing off a home over. With that said, it’s wise to perform a septic inspection before you buy a home to make sure it’s functioning property and doesn’t have any glaring problems.
There’s a theory that a home should be treated strictly as an investment. While that may be true for real estate investors and the cast of HGTV’s “Flip or Flop,” most first-time homebuyers are looking for a place to call home.
Real estate investing may look easy in the current climate of rapid home appreciation, but a return on investment is not guaranteed. In fact, a primary residence shouldn’t be considered an investment for the following reasons:
- You can’t sell it a moment’s notice like stocks or bonds
- The carrying costs of maintenance, taxes, insurance, etc. are high
- A home can tie up cash and inhibit other investments
- Appreciation is not guaranteed
Buying a home solely as an investment comes with substantial risk that should be carefully considered.
The bottom line is that you have to live somewhere. There’s nothing wrong with buying a home based on what’s best for your family and not your investment portfolio — as long as you stay within your means.
Speaking of inspections, Kemp stressed that it’s important to pay attention to the quality of the inspection. First-time homebuyers may not realize that there is a world of difference between quality and shoddy home inspections.
“A lot of times in this market, the seller’s agent will get a seller-procured inspection when there is a short listing window,” Kemp said. “I’ve seen more ridiculous inspections than you would believe. One had no notes at all — just pictures from far away. The inspector didn’t even go on the roof, or all the way into the crawl space or attic.”
The inspector Kemp refers to her clients creates 100+ page reports complete with close-up pictures. He inspects the entire home and even does an infrared scan that can detect water leaks that aren’t visible to the naked eye.
“This can save people thousands of dollars, and sometimes it’s the reason we’ve walked away from homes,” Kemp said.
Even if you’re in a time crunch, vet your home inspector carefully. Ask what they’ll cover during the inspection — and make sure they’ve followed through once you receive their report. Check their testimonials via Google Reviews and Yelp as well. See what other homebuyers have to say about the company’s thoroughness and professionalism.
The phrase “buy low and sell high” is solid advice for the stock market, but it doesn’t exactly hold up in today’s housing market.
First of all, it can take years for the housing market to change directions. Homebuyers “waiting out the market” may end up on the sidelines for longer than they expect, all while paying rent instead of building home equity.
The waiting strategy especially doesn’t pencil out in today’s housing market. Interest rates are expected to increase beginning as early as the end of the year. Meanwhile, home prices are expected to continue climbing — albeit at a slower rate — given the persistent supply shortages and an incoming wave of millennial buyers.
In a few years, buyers who decide to wait out today’s conditions will likely be paying higher home prices with higher interest on their loans.
Kemp said even waiting for summer inventory to come online isn’t always advantageous.
“That’s because sellers want to sell in the best light, which increases the price of the home,” she said. “I like to see houses when it’s pouring down rain sideways in the worst time of year. There’s less competition, and if the buyers like it then, they’re going to love it in the summer.”
The right time to buy a home depends more on your own situation than the market’s.
You need excellent credit to buy a home
This is another one of the biggest homebuying myths.
Your credit score plays an important role in the homebuying process. It affects your interest rate and the strength of your offer. But just because you aren’t rocking a 780 credit score doesn’t mean you can’t buy a home.
In fact, it’s possible to get an FHA loan with a score between 500 and 579. However, you would need at least a 10% down payment. A vast majority of FHA loans go to borrowers with credit scores above 580 — and with a 580 or higher, you can qualify for an FHA loan with 3.5% down.
Neither the USDA or VA have set minimum credit scores for their 0% down payment loan programs, although most lenders require between 580 to 620 minimum for these loans.
You’ll need a minimum 620 to qualify for a conventional loan. But the higher the better, because your interest rate is determined largely by your credit score. For example, someone with a score between 680-699 could get a drastically better rate than someone in the 660-679 tier.
By some estimates, having a 679 instead of 680 could cost you an extra $47 per month on a 10% down $350,000 loan.
Similarly, your interest rate on a conventional loan could be higher if your score is at or below the following:
It could be worth gaining just one point if you have one of these scores.
All in all, while you don’t need excellent credit to buy a home, a higher score can save you significantly in interest.
Student loan debt is a fact of life for many of today’s first-time homebuyers, but it doesn’t have to put you on the sidelines for buying a home.
According to the NAR:
- 43% of younger millennials (born 1990-98) have student loan debt with a median balance of $25,000
- 37% of older millennials (born 1980-89) have student loan debt with a median balance of $33,000
In 2020, student loans delayed saving for a down payment on a home for 47% of all homebuyers. This debt clearly makes it harder to buy a home — but not impossible.
You can use a combination of down payment assistance and low-down payment mortgage products to overcome the down payment barrier. Here’s a list of 12 mortgage options that require low or no down payments, some of which can be combined with gift funds or down payment assistance.
After clearing the down payment hurdle, student loans may come into play while calculating your debt-to-income ratio, or DTI. This ratio is calculated by adding up your regular monthly expenses, including future mortgage payments, and dividing it by your gross monthly income.
Lenders use DTI to determine your ability to repay a loan. Most are looking for a DTI of 50% or lower. If you aren’t there yet, you can improve this score by minimizing your monthly payments or reducing your target mortgage payment.
Some loan programs are more lenient on student loans than others. For instance, the FHA recently updated its guidelines for calculating student debt in DTI to make it easier to qualify.
You should only choose a 30-year mortgage with a fixed interest rate
Perhaps one of the more obscure homebuying myths, but worth debunking nonetheless.
A 30-year, fixed-rate mortgage is considered the standard loan option, but it may not make sense for all homebuyers.
According to the National Association of Realtors, people stay in their homes for 10 years on average. While that’s slightly above the historic average of 6 to 7 years, it’s a far cry from the life of a 30-year mortgage.
First-time homebuyers looking for a starter home or who are subject to moving for work every few years might consider an adjustable rate mortgage (ARM). With an ARM, the interest rate stays fixed for an initial period before adjusting based on the market rate each year after.
According to the Freddie Mac Primary Mortgage Market Survey, the 5/1 ARM (in which the rate is fixed for an initial five-year period) has been substantially lower than the 30-year fixed rate since late February 2021.
The housing market is in constant flux, and it’s changed dramatically in the last 30 years. While your parents likely have the best intentions when imparting words of advice, some of their hard-earned wisdom may not hold up in today’s market.
That’s why it’s smart to work with an experienced real estate agent and trusted mortgage lender who can talk you through your homebuying options and what you need to know to win in today’s market.
*Fairway does not guarantee a mortgage loan will result in equity gains or tax advantages. Any potential benefits from homeownership are based on individual factors. Contact your Fairway loan officer for more information regarding your specific situation.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.