Don’t Believe These 3 Mortgage Myths

by Miranda Marquit · 15 comments

Mortgage rates are near historic lows. Predictions that credit downgrade for the U.S. would send mortgage rates soaring haven’t come to pass (not yet, at least). So far, there are still chances to get incredibly low mortgage rates, whether you are buying a home, or refinancing your current mortgage. However, before you get too excited about the latest mortgage rates, it’s important to understand some of the mortgage basics. Here are 3 mortgage myths you should not believe:

Myth #1: A Good Income Means Good Loan Terms

Anyone who has tried to get a mortgage as a self-employed person knows that it’s far from easy to get a good loan rate, no matter your income. When I bought my home four years ago, before the mortgage market crisis, I had to go through an income audit in order to be approved.

Your 1099s aren’t as encouraging as a straightforward W-2. Additionally, those of us who are self-employed take care to use as many tax deductions as legally possible — and that can skew the view of income.

Besides, even if you have a good income, if your debt to income ratio is high, or if you have a low credit score, you might not get the best interest rate offered on the market.

Myth #2: Once You Get That Approval, You Are Set

Many people assume that once they are approved for a mortgage loan, they are all done with worrying about their credit scores, or other matters. However, this just isn’t the case. Many mortgage lenders pull your credit again between your approval and the loan closing. In fact, lenders might check your credit score again as near as five days before the loan closes. If that happens, and your credit score has taken a dive, then the financing could fall through at the last minute.

Remember that your credit might be checked again after mortgage loan approval. Avoid applying for new credit accounts, and avoid running up credit card balances. If you want the best mortgage rates, you need to keep your credit in good shape until the closing goes through.

Myth #3: As Long As You Pass the 30% Rule, You’ll Be Fine

If only! While the 30% rule can be a useful guide to helping you determine whether or not you can afford a mortgage (I like to use the 25% rule myself, and include all housing costs as they relate to my net income), it doesn’t have much bearing on whether or not you are approved for a loan at the best mortgage rates.

Many lenders, when deciding what mortgage rate to give you (and even when deciding to approve for the loan) use what is known as the 28/36 qualifying ratio. This ratio looks at how much of your income goes toward the mortgage payment each month, as well as how much of your total income goes toward debt payments — including the new mortgage — each month. This means that your mortgage should be no more than 28% of your income each month, and your total monthly debt payments shouldn’t exceed 36% if you want the best rates.

Bottom Line

If you want to prepare your finances for the bets possible mortgage interest rates, you need to know what lenders are looking for, and avoid falling for mortgage myths that can lead you astray.

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{ 15 comments… read them below or add one }

Bernard August 23, 2011 at 5:37 am

Another mortgage myth I would add is that “It is great to send in extra payments”.

We have been taught, probably by banks, that we can save all that interest. But, there is a cost of opportunity. “Equity” in your home does nothing. It’s unsafe, illiquid, and doesn’t earn interest.

To access the cash, you either have to sell or refinance. You have to ask the bank permission to borrow your own money.

Put those extra dollars in a vehicle that makes the money work for your. Otherwise, you may be just sleeping on a buried pile of cash.

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AJ December 8, 2011 at 1:00 pm

Bernard,

You are correct that the equity in your home is unsafe, illiquid and doesn’t earn interest. Extra payments are great for those who have paid off all other debt, are putting the maximum into retirement, college funds (if applicable) and have a well stocked emergency fund. The extra payments are not in themselves going to earn interest, but the principal they reduce saves interest.

For instance, let’s see we have a $100K mortgage over 30 years at 5% starting today. The payments would be $536.82 per month and the total interest would be $93,255.78 and the mortgage paid off in December 2041.

Now, let’s take the same numbers above but add one $1000 per year. The total interest is now $67,137.23 and the mortgage paid off in July 2034. That’s a savings of $26,118.55.

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bandb June 3, 2013 at 10:45 am

Mort is a French word meaning “death” and gage means “pledge or agreement” So the meaning of the work Mortgage is an “agreement till death.”

Send in extra money and be free!

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Ginger August 23, 2011 at 7:29 am

What frustrates me is if I buy a rental I can have up to 40-45% of a debt load yet it has a higher interest rate but if I buy a second home and plan to rent out the current one, I can get a lower interest rate yet my debt load has to be lower.

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MortgagesByMark August 28, 2011 at 8:24 pm

Hi Ginger, actually the 45% rule applies whether it’s a rental or owner-occupied property under Fannie Mae guidelines. The reason the rates are higher for an investment property is because they have a much higher default rate. Think about it, if you ran into financial trouble, what property would you stop paying on first, the rental or the one you live in?

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Emily August 23, 2011 at 8:28 am

I didn’t know that about being self-employed making it harder to get approved. Good thing to know!

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Patrick R. Carlson August 23, 2011 at 10:14 am

Being self employed has certain advantages, but when it comes to borrowing money for a mortgage (or other purposes), it is decidedly not an advantage. The poster is entirely correct that many banks or loan officers don’t understand that a tax return, taken alone, is not a good representation of actual income, because many times deductions can reduce income, but may only have a limited effect on cash flow. Cash flow is really the issue that the lenders should be worried about, because having the actual cash to service the debt is more important than the amount of “income” for tax purposes.

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Denis August 27, 2011 at 4:52 pm

Having a large sum of money as an emergency fund such as 6 months to a year of income as cash set aside and only used for REAL emergencies does a lot to help, especially if that $$$ has been set aside for 2 or more years. That can cover those crappy months where the income does not meet the needs of the business and business owner. A bank can look at that and see that you are more than just a BS FICO credit score, (a score that is only about your debt and how you pay it)

I am still trying to get over my last emergency which killed my baby emergency fund (the one I had in case of smaller emergencies while I built up to the real emergency fund). My baby emergency fund got wiped out by an emergency that was 3.2 times what I had saved up.

So now I am building up my baby emergency fund while I also need to build up that one year of income.

But having a good bag of cash set aside helps. No doubt abut that.

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Welcome Finance August 27, 2011 at 7:12 am

Securing a loan means we have to abide by the rules of the lending institution. We are affected by the downgrading of our economy.

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MortgagesByMark August 28, 2011 at 7:03 pm

Great post, and you’re absolutely correct. Just because you have a good income, it doesn’t mean you’re going to be able to qualify. This is particularly true for self-employed people who write off a lot on their taxes. I once had to tell a doctor with tons of equity in his house, great credit, and hundreds of thousands in the bank that I couldn’t get him a loan because he didn’t show enough net income on his tax returns after all deductions. Completely ridiculous! But, such are the lending guidelines these days.

And yes, you may have a loan approval, but it doesn’t mean your loan is a done deal. There are plenty of things that can come up that can kill your loan, such as appraisal issues, title issues, credit scores dropping, new debts popping up, etc. The loan may be approved, but the lender may not be done verifying everything to make sure you’re truly creditworthy according to the guidelines.

Good post!

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Phil February 15, 2012 at 2:26 pm

Mentioned in the article is the statement that Self-employed use tax deductions, as if this would affect gross income. This is a myth, one this article is helping continue. Self-employed have problems proving income, because they simply hide it.

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JoAn Thompson-Simmons April 12, 2012 at 2:22 pm

I am interested in pursuing workout options, but the figures have to be
correct.

Property location:
2673 Hewatt Road
Snellville, Georgia 30039
Wells Fargo Loan Number 8480613424
I bought this property through Sun America (which is now an insurance
company) and moved in during 1997. The paper was sold to GMAC for about 6-9
months. Then, the paper went to Homeside Lending, who lost two payments and
paid two insurance policies. The paper then went to Washington Mutual
(which I thought was fine when they built a building close to me until I
learned almost their entire operation was computerized).
While my loan was held by Washington Mutual (whom I later learned was also
Homeside Lending), I sent my payments, usually via money order, in a timely
fashion to their address at P. O. Box 3139 – Milwaukee, Wisconsin and then I
would receive notification from their office at P. O. Box 44118 –
Jacksonville, Florida that payments had not been received and I was behind
in the mortgage.
Wells Fargo Home Mortgage acquired my loan in December 2007 and I continued
to make regular payments in a timely fashion until I received notification
from them that the mortgage was behind and they were crediting payments two
years in arrears. I phoned them regarding this and was told to provide my
payment history, which I did via over-night Federal Express on October 15,
2008 showing the fronts and backs of payments.
They then provided me with a Customer Account Activity Statement showing
seven (7) pages of payment history.
Shortly thereafter, Wells Fargo threatened me with foreclosure again via
attornies, McCurdy and Candler, LLC – Suite 600 – 250 East Ponce de Leon
Avenue – Decatur. Georgia 30030 and I filed bankruptcy (for the fourth (4th)
time with attorney, Richard K. Valdejuli, Jr.- Suite A – 2199 Lenox Road –
Atlanta. Georgia 30324.
I have talked with numerous people at Wells Fargo, incurred extensive
expense, and still have not had the house properly inspected nor repaired
(via FHA).
I have asked that the attorney fees and late payment fees be removed from my
account, and that the interest rate be lowered and the payments be lowered.
This property is my only debt and I have only it and the utilities
accompanying it, etc. – no car payment and no credit card debt..
I have attempted to work out something with Wells Fargo because I have been
making payments on time and only received from them (dated December 9, 2009)
a monthly mortgage statement that shows I am still in arrears
$17,501.88.with $537.84 being late fees.
According to my records, the current loan amount should be approximately
half what it was when I purchased this property – approximately $40,000; not
more than it was when I purchased it – $85,000.
I contacted “makinghomeaffordable.gov” about two months ago and was told by
Wells Fargo that they would “look into this situation” and get back to me,
which they have not. I was advised by “makinghomeaffordable.gov” to contact
the Attorney General in Georgia.
Since compiling this information, Wells Fargo Home Loans has lost four more payments and misapplied the last two.
Sincerely,
JO AN THOMPSON-SIMMONS

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JS July 27, 2012 at 5:17 pm

It’s unbelievable that the lenders pay so much attention to credit scores and 1099s vs W2s …when MOST of their existing mortgages haven’t had a payment made in 5 years. SCAMerica is the DUMBEST and MOST BACKWARDS and MOST CORRUPT nation on EARTH – with a 90/10 BRAIN DEAD ratio.

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Tim L August 30, 2012 at 12:28 pm

This is very negative all round. Debunking mortgage myths should include the following. #1 It is easier to get a mortgage than you think, many people I speak to would not even consider buying as they have been led to believe by the press and those around them that they wouldn’t have a chance. With a reasonable deposit and affordability the majority of people would be able to get a mortgage. #2 It is not a good time to buy a property. Speaking from a Northern Irish perspective I talk to a lot of people who feel that they are stuck in the rental bubble. Rents are creeping up, and if you compare the cost of ownership including verus rental, ownership is cheaper (if using the example of a 3 bed pp of £80k) whats more the capital in the loan is being paid down creating equity over time. If you are buying at the lower end of the market there is a surplus of properties being brought to market which is surpressing the prices but within a few years there will be less supply at these rock bottom prices. If you are secure in your employment and have 10%-15% to put down you are in a great position.There is a silver lining for some.

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Denis August 30, 2012 at 5:03 pm

Home ownership is NOT reasonable where I live. The home of £80k in your area is different from here. The $120k house here (£80k is about 120k $) is a shack needing as much in repairs as there is on the mortgage. Cheaper to burn it down and start from fresh. The typical house here sells for $350-650k with the higher priced house being a good family home. the $350k will get you a used 2 bedroom condo, and even the mobile homes on a rental spot start at 79k and up. Houses on some streets facing the ocean views are upwards of 5 million dollars. Certainly not affordable on the typical wage of 12-14 dollars per hour that is typical here.

Location. Location. Location. It all depends on where you are. Other places here in Canada, I could buy a house for $20,000. But there is nothing in the world that could entice me to buy there! Where I am we have a mild winter, with -5 c being a really cold day, whereas that $20k house would suffer the wrath of -40 degrees C for weeks at a time, and unemployment unless I wanted to be a farmer. No thanks!

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