Mortgage Myths That Stop Homebuyers From Applying for Loans

Some potential homebuyers keep themselves out of the mortgage market because they have misconceptions about credit, down payments, and interest rates on mortgages.

A Veterans United survey of civilians and veterans who plan to buy a home in the next three years has uncovered some key things potential buyers get wrong about mortgage lending. Don’t let these myths derail a home buying dream.

The first myth has to do with credit scores. Of those surveyed, 57% believe a borrower needs at least a 660 credit score to qualify for a mortgage, and 34% believe a credit score of 700 or higher is needed to qualify for a home loan. 

The reality is a different story. Borrowers with credit scores of around 620 can qualify for home loans, and some mortgage lending programs accept borrowers with even lower credit scores. 

These home loans — available to veterans, service members, and surviving spouses — are provided by private lenders, and the U.S. Department of Veterans Affairs guarantees a portion of each loan.

Federal Housing Administration (FHA) loans are available to borrowers with credit scores as low as 580. These loans, which are provided by private lenders, have been around since 1934 and are insured by the FHA.

Forty-six percent of those surveyed by Veterans United think a conventional home loan requires making a down payment of 5% or more, and 15% believe a 20% down payment is required on such a loan.

A 5% down payment is a common minimum for many conventional loans, though some qualified first-time buyers may be eligible for conventional loans with as little as 3% down.

And there are some loans available with lower down payment requirements. For example, first-time homebuyers may qualify for a mortgage loan with as little as a 3% down payment. And FHA loans require a 3.5% down payment. 

VA loans have no down payment requirements. And neither do USDA loans, which are backed by the U.S. Department of Agriculture. But potential buyers may not know about these options. Thirty-one percent of potential homebuyers surveyed said it wasn’t possible to buy a home without a down payment.

“When buyers think they need perfect credit or a huge down payment, they can take themselves out of the game before they even get started,” Chris Birk, vice president of Mortgage Insight at Veterans United, said in an online statement. “The truth is there are flexible loan options designed to help people.”

A large number of potential homebuyers surveyed by Veterans United were wrong in their thinking about the setting of mortgage rates. Mortgage lenders set their own rates, but about 61% of those surveyed think the government decides mortgage rates. 

About 63% of survey respondents believe mortgage rates are at their highest point ever, when in fact mortgage rate averages were around 6% at the time the survey was taken. 

“Mortgage rates aren’t one-size-fits-all; they can vary significantly based on the lender, the loan program and the borrower’s overall profile,” Birk said. “That’s why it pays to shop around and compare rates, costs, and fees among multiple lenders.”

Misconceptions about mortgage lenders may be holding back potential homebuyers from pursuing their dreams of owning their own homes. Credit scores needed for qualifying for a home loan are much lower than people realize with a 620 credit score needed for VA loans and a 580 credit score needed for FHA loans.

The down payment is another aspect of mortgage lending that people get wrong. Forty-six percent of those surveyed thought you needed a down payment of 5% or more on a home loan when 5% is the minimum down payment needed for a conventional home loan.

Some home loans have no down payment requirements or have requirements as low as 3%.