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Busting the biggest conventional loan myths

Busting the biggest myths about conventional loans

When it comes to buying a home in today's real estate environment, certain facts and falsities have proven the test of time. Chief among these truisms is the direction of asking prices. They seem to be going up with each passing month. In fact, they've continuously risen for the last 91 consecutive months, according to the National Association of Realtors.

In contrast, mortgage rates seems to be staying low. While it's true that rates can go up and down due to market fluctuations, they've remained in historically affordable territory for the last several years, as detailed weekly by Freddie Mac. This has led to a surge in applicant activity for various mortgage products, especially for conventional loans. These offer a tremendous amount of flexibility to buyers, but because they're not backed by a government entity - such as the Federal Housing Administration or Veterans Administration - the eligibility standards tend to be a bit more rigorous, particularly in terms of credit score requirements and a few other aspects.

20% down payments are not mandatory

20%
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This raised standard may explain what's given legs to one of the oldest myths in the mortgage world: that a conventional loan requires a down payment of 20% or more.

It's time we put this fallacy to rest once and for all. And here's the truth: Down payments come in all sizes. The numbers speak for themselves. In 2019, the median down payment in the U.S. was 12% among all buyers, according to the most recent statistics available from the NAR. For those who were in the market to buy for the first time, the median was 6%.

Meanwhile, for families who had purchased a house previously but were looking to purchase again, their median down payment in 2019 was 16%.

Here's an example that can provide added context, based on the real estate market as it currently exists. Nationally, a median-priced house in September 2019 cost the average family approximately $272,100, according to NAR. With a down payment of 6% - which was the typical percentage among first-time buyers - that equals out to $16,320.

This may seem like a lot, but it's considerably lower than the 20% many people wrongly assumed they need to come up with to be approved for a conventional loan. Using the previous example, a 20% down payment would be around $54,420.

Here's the cool part about conventional loans, though: The down payment can be even lower than 6% - even 3%. This means you could put down as little as $8,163 and still be approved after your other qualifications are examined.

While polls show that most people actually prefer saving to buying, the cost of living makes putting money aside a bit of a struggle. Indeed, according to a recent survey analysis conducted by Gallup, Americans are spending higher dollar amounts on various common expenses today than they have since 2009. Over one-third of respondents said as much, up from 30% in a similar poll last year and double that of 2009, when 17% indicated their costs were higher than normal.

Down payment can come from gifts

The fact that you can reasonably afford a down payment should hopefully provide some sense of assurance that a conventional loan isn't as restrictive as you might have been led to believe. But here's another myth-buster: Down payments don't necessarily have to come from you. In other words, if you were given a large sum of money as a gift from a friend or family member, you can use that as a down payment if you'd like. In 2019, 1 in every 3 first-time homebuyers received help from friends, siblings or parents in order to pay for the down payment on their home loan. This included those for conventional mortgages.

None of this is to say that you shouldn't go with 20% or more as a down payment. If this amount is something you can reasonably afford, by all means go for it. In doing so, it allows you to pay off your mortgage in a potentially quicker time period and also spend less per month over the life of the loan. A 20% down payment may also enable you to avoid purchasing mortgage insurance, which is typically a prerequisite for down payment sizes below this threshold.

Debt-to-income (DTI) ratio standard is 43% or lower

Here's another encouraging aspect of conventional loans: As with most other loan products, the debt-to-income ratio cut-off is 43%. Some believe that since private lenders take on more risk because conventional loans aren't backed by the government, lenders will require you to have a smaller DTI ratio. Not necessarily. Every applicant is different so your qualifications will be considered in their entirety.

There are a lot of myths floating around out there about down payments and how hard it can be to be approved for a mortgage. Hopefully this has helped set the record straight and shown that you have what it takes to be approved. Find out for sure and contact RMS today. We'll guide you home.