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If you’ve dreamed about owning your first home, you probably have an idea in your head about what type of home you want and maybe a vague notion of how the whole process works. In my experience, however, often times the image in your mind is quite different from reality.
Here are a few common misconceptions that first time homebuyers think, but aren’t actually true.
Myth #1: You need a perfect credit score to buy a house.
Reality: While a higher credit score is beneficial for securing a mortgage and potentially a lower interest rate, a “perfect” score is not required to purchase a home. According to Bankrate.com, the average credit score for a first-time homebuyer is 746. A conventional loan has a minimum of 620. An FHA loan goes down to 580. So, if you’re credit score isn’t perfect, you aren’t necessarily out of luck.
Myth #2: You need a 20% down payment.
Reality: Back in the day, yes. A 20% down payment was the norm. However, times have changed. In fact, in 2021, the average down payment for first time home buyers was only 7%.
Myth #3: Your first home should be as nice as your parents.
Reality: A good portion of whether this myth is busted is subjective; dependent on many factors, including location, employment, etc. But for many young, first-time buyers, housing price inflation is a primary reason why your first home may not be the dream home your parents were able to purchase. Since 1970, housing prices have skyrocketed 1608% while the Consumer Price Index rose only 630%. In the Seattle area, the past 20 years have been brutal for first time buyers, with home prices soaring more than 235%. So, my advice for first time buyers is to set realistic expectations. Most likely there is a home for you, you just may have to make some adjustments to your thinking.
Myth #4: Your down payment covers closing cost.
Reality: Sorry. No. Your down payment will be applied to the cost of the house, but it will not cover your closing costs, which include escrow fees, title insurance and taxes to name a few. It will also not cover any pre-purchase costs for home inspections, appraisals or loan origination fees. All of these things can really add up. So, referring back to Myth #2, even though you may not need 20% of the home value for a down payment, you do need to figure in that closing costs will run you 2 – 5%.
Myth #5: New home buyers never owned a house.
Reality: This point is interesting. A first-time homebuyer is actually anyone who has not owned a home within the last 3 years. So, maybe you owned a home, got a divorce, rented for a few years and are looking to buy again. In the eyes of the IRS, you are a new home buyer and therefore qualify for certain tax advantages and special programs designated for first time home buyers.
Investopedia has a great resource: First-Time Homebuyer’s Guide. Or just call me to discuss your options. If you are planning on buying, now is the time to prepare and get all of the answers you need to set yourself up for home-buying success.
