Ninety-three percent of American adults believe that owning a home is part of the American dream, and 81% believe that owning a home increases financial stability, according to a recent survey by NeighborWorks America. Unfortunately, many Americans have misconceptions about what is necessary to be able to purchase a home.
With that in mind, here are three things Americans think about the homebuying process, and the truth behind each one. If you want to buy a home, but don't think you'll be able to, you may find that some of the excuses holding you back are just that: excuses.
Myth 1: You need a big down payment to buy a home
According to the survey, the average American believes that 17% of the purchase price is the minimum down payment required to buy a home. Millennials have an even more pessimistic view – they think that a 21% down payment is required.
It's true that a 20% down payment is the mortgage industry standard, but it is by no means a minimum requirement. A conventional mortgage can be obtained with a down payment of as little as 3% by creditworthy borrowers, and even lower-credit applicants can obtain an FHA mortgage with a down payment as low as 3.5%.
Even better, Veterans and buyers of certain rural homes can potentially qualify for no-money-down financing through the VA and USDA loan programs, respectively. Some individual lenders offer 100% financing programs as well that anyone can take advantage of, so it could be a good idea to visit a few banks in your area to see what's available.
Myth 2: You need excellent credit to get approved for a mortgage
Seventeen percent of all adults and 22% of millennials say that credit is an obstacle standing in the way of becoming a homeowner. And it's true that a high credit score certainly helps your chances of approval and can get you a lower interest rate.
In reality, however, relatively few potential homebuyers can't buy a house because of credit issues alone. The median FICO credit score in the U.S. is 700, while the minimum credit score necessary for a conventional mortgage is just 620. An FHA loan with 3.5% down requires a FICO score of 580, and with a 10% down payment, it's possible to get an FHA loan with a score of as little as 500.
According to FICO's latest score distribution data, 70% of the population has a FICO score of 650 or above, and 80% are above 600. Just 4.7% of the population have a FICO score under 500.
To be clear, borderline credit combined with other issues, such as little money in savings, unstable income, or lots of debt can be a reason for mortgage rejection. But for most people, credit alone is not a major obstacle.
Myth 3: Student loan debt will prevent you from buying a home
Student loans are a big issue in the U.S., especially for younger Americans. More than half of millennials have student loans, and nearly one in four millennials say that they have delayed buying a home because of their student loan debt.
The idea that student loan debt will prevent you from buying a home is true in some respects, but recent changes to the mortgage qualification guidelines have been implemented specifically to make it easier for student loan borrowers to buy homes.
To make a long story short, government-sponsored agencies Fannie Mae and Freddie Mac publish standards for conventional mortgage approval. One of the main criteria is the borrower's debt-to-income ratio, which is the borrower's total monthly debt obligations (including the new mortgage) as a percentage of their pre-tax income. For example, if a borrower had monthly debts of $1,000 and income of $5,000, this would translate to a 20% debt-to-income ratio, or DTI.
Until recently, the maximum allowable DTI under Fannie Mae's guidelines was 45%. However, as of July 29, 2017, this maximum has been raised to 50%, specifically to make it easier for first-time buyers to get approved.
Now, this isn't to say that buyers necessarily should buy a home that results in a 50% DTI ratio. But student loan debt might be less of an obstacle to mortgage approval than you might think.
The Foolish bottom line
I own my home, and I generally believe that buying a home is a smart financial move for most people. That said, it certainly isn't for everyone, and there are some perfectly good reasons why you might be better off renting.
The takeaway here is that if you want to take the leap into homeownership, don't be so sure that your lack of a down payment, credit score, or student loan debt will prevent you from buying a home of your own.
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