BUSTING FIRST HOME BUYER MYTHS
Buying a first ever home is a dream come true and a moment to remember and celebrate. Be informed that property investment is a lot of work to do. Your research is the only thing that can save you here. Now! When you will be researching your way in, you may come across many information, some being true and some misleading. If you have decided to enter the real estate industry let us inform you that it’s a long term race and probably the finest decision one can make to make generous money. Therefore, it’s a matter of wisdom that you must not get trapped into the Myths which ultimately land you on stepping back off your decision.
When we step into something new all the people surrounding us, start advising multiple things. But not all of them are absolutely correct all the time. Though being our well wishers, sometimes their advice can go wrong as it’s unnecessary what worked for them can work for you or what did not work for them, cannot work for you. Hence, wander a little and shop around and understand how to choose the right investment property for yourself (Link to How to choose an investment property) while finding what works amazing to you as only you are aware of your needs and circumstances.
We have accommodated a list of 10 most common and widely believed Myths that are waiting to get bursted. So, let the busting begin!
10 MYTHS SPLINTERED
- You shall opt only for Loan with lowest possible interest rates:
Well! By our human instincts the very first action our mind wants to take is to opt for the lowest possible interest rate loan, isn’t it? Now you probably are wondering what is wrong in minimising all the probable charges?
It’s not always wrong but you have to be very careful. You see, whatever looks too appealing you should be extra careful there. Loans come with multiple terms and conditions which you must read very rigorously.
Many times the interest rates on the loan seem low but there are a lot of other charges that eventually end up costing you higher than any other loan option. Some loans could be of lower rate with an adjustable mortgage hence, with the fluctuations of the market it may affect your interest rates.
Choose a loan option where you have a lot of options and freedom available with it which can ease your repayment system. Explore more options and then finalize as to which loan suits your requirements well.
- Always advance for 30-years fixed mortgage:
A 30-years fixed mortgage loan is well-known for its predictable payment facility. But it can eventually become expensive if you plan to repay your mortgage sooner or in large sums.
So if your intentions are to hold the property for a shorter period let’s say less than 20 years then you can opt for a 15-years fixed mortgage option. But if you are in the race for a long run then choose adjustable loan option or the best – interest-only loan variant.
You definitely choose this based on your personal purpose and vision. Every Loan option has its own pros and cons hence, you must talk and understand the phenomena very clearly by your lender. Also, choose the lender wisely as well as in the competitive edge like today with a good guidance you can rock or with a bad one you can slip off.
- Monthly you only have to pay towards your mortgage:
It is pretty naive to think that you will need to pay only towards the mortgage.
Property investment comes with many other costs associated with it. Leave enough space to accommodate the regular costs such as:
- Maintenance costs
- Water rates
- Unexpected repairs
- Insurance
- Taxes
- Accounts
- Council rates
- Bank fees
- Property managers fees
- Strata fees
- Travel costs
- Advertising etc.
Hence, consider looking into it and make provision for all the probable costs or charges that can imply on various kinds of properties.
- Only an excellent Credit score can secure you a house:
Credit score no doubt is an important thing to keep up with. But it is not an absolute thing for getting a loan. There are multiple aspects that a lender checks in to qualify you for the loan such as your total asset value, your income, debts, property type, any existing loans etc. apart from your credibility as per credit score.
Even if your credit score is low or poor you may qualify for other federal government housing schemes. One such property option can be the NDIS property investment Scheme(Link to NDIS – an Exclusive opportunity) which is getting popular in Australia now-a-days.
You can also approach some private lenders or hard money lenders.
- 20% deposit of total property value is mandatory to submit:
A 20% deposit is a better option to kick start with the investment property. It is a proven fact that the more you deposit the less you gotta pay towards your monthly mortgage but it isn’t mandatory at all. A lot of people actually avail the loan at the rate of 5% to 10% if they cannot save and afford upto 20%. Also, if you’re a professional like a doctor, engineer or accountant, lawyer etc. good news for you that your lender’s mortgage insurance can also be waived off. You can get 90-95% of your investment property sanctioned for loan.
Government-backed options, such as FHA loans and USDA loans, can be availed at the minimum of 3.5% down payment as well. Members of the armed forces or a veteran can be eligible for a VA loan, through which you can buy a home with 0% down.
Hence, it is only a myth that you have to compulsory save a large amount for the 20% down payment as it can be paid below that as well. But you must remember that paying less down payment leads to higher sum payable towards mortgage or lender’s mortgage insurance.
- Your pre-approved loan is good to go for any property type:
A lot of first home buyers make a huge mistake considering their pre-approval of loan to be the final and get super boomed about it. But the actual loan underwriting and pre-approval are dependent on multiple factors such as financial situation, income status, type of property, location etc. and it can change the scenario completely. Hence, it is extremely crucial to understand what factors can affect your pre-approved loan till it reaches the actual underwriting stage. The bank has the authority to change the terms and all based on the above mentioned factors if they are changed in between the underwriting and pre-approval process.
Also note that some banks may or may not allow the loan approvals for inner-city areas and few restrictions are also pulled over Unit complexes. So, prior to taking any action, you must speak to your mortgage broker and shortlist all the options and scenarios.
- Your student Loan can be hindrance to housing loan process:
Your student loan does not predominantly serve as a disqualification or hindrance to allot you a loan towards your property investment. Yet, it is needless to mention that it will definitely affect the amount of loan that you can borrow. If you have any other ongoing loans going on including student loans, The bank will also check your DTI Ratio i.e. Debt to Income Ratio. Now, DTI basically means how much amount or chunk of your income falls towards the repayment of other debts. DTI can also be very helpful if maintained well as it improves your
Basically the bank checks your credit worthiness after deducting the existing loan amount and then decides how much it can lend you.
There are certain conditions that can work in your favour (excluding FHA, VA, CHFA loans) if you have a student loan such as:
- If your employer or parents have taken up the obligation of paying your student loan then it will not be considered in your DTI Ratio.
- Lenders can use your existing payment until its Zero if your loan is an income driven loan.
So, it does not abolish your borrowings, it only restricts the amount that you can receive.
- Small Business Owners are ineligible for borrowings:
Being a small business owner definitely does not make you ineligible for the mortgage. To the lenders every borrower is important and they follow the same protocol for all and they try to cover up for every Australian.
Though small business owners are not restricted to avail the loan but it may limit the actual loanable amount. The owner needs to submit multiple documents such as the financials of 2 years, Individual tax returns, Corresponding ATO notice of assessment for this period, Business activity statements (BAS), P&L statements, balance sheets, and business transaction account statements, etc. on the basis of which the lender will analyse the capability of mortgage repayment and decide whether he/she is eligible or not.
Most of the researchers find that a lot of small business owners get stuck in this Myth and do not even try to apply thinking that they can not afford to add any further debt until they grow in the business.
- All lenders are same:
Aussies usually also are mistaken that all the lenders are the same. One must do their bit of research as this is clearly a Myth. Now, the main question that arises here is How do you differentiate the lenders and find out the best for you? According to americanfinancing.net – For that you shall ask the following questions to the lenders:
- Do you charge anything out of pocket?
- Are there any programs offered that can help me with my down payment or closing costs?
- What loan program is best?
- What is my interest rate going to be?
- Is there a prepayment penalty on my loan?
Hence, Identify your lender and then make a choice. A proper lender will help and guide you better in finding the best possible fit for you. Hence, talk to all the possible lenders you can be it online mortgage lenders, Loan consultants, credit unions, banks and various other options. Make sure you are going the right road.
- Parents Guarantee:
Parents can help their Adult children in buying a home in many ways, one of which is being a guarantor which means parents can put their property against the loan or mortgage for their Adult children. As a guarantor if the child defaults then the parents would be eligible to pay the due.
Apart from providing their guarantee for loan, parents can be helpful in following other ways:
- Gift the down payment or home buying expenses
- Loan them money individually
- Improvise their credit base by helping them understand the same
CONCLUSION
We believe that buying a first ever home can be overwhelming and a big step, also scary sometimes. Hence, we all try to play safe and let the risks and such Myths drive us away from let’s say our life’s best possible decision. Having said that, we also suggest you to avoid the most common mistakes made by other first home buyers( Link of Common property investment mistakes and how to avoid them) and turn out to become a smart investor(Link to Smart Property Investment) over the period of time.
You shall always work with the right set of people to find the best fit in your budget. There are many marvelous benefits allotted by the government to encourage more first home buyers in Australia which you shall be aware of while buying your home such as First Home Owners Grant, First Home Loan Deposit Scheme, First Home Super Saver scheme, HomeBuilder Scheme, etc. These schemes are available in almost all states of Australia hence, you must do your homework and then consult with your loan officer.
One more trick that can help you stay on track is going in a proper sequence. Make a list of what all stages can be there in buying a house and try to research about those stages while staying on the track. This will help you formulate more informed and wiser decisions. On that note, we hope you have got a better idea about the busted Myths and find this article helpful enough. If you are a seasoned investor and want to share some insight or your experience with our readers then you may comment them down. Until next time, keep researching and keep investing!
