Owning a home may still be an important part of the American Dream, yet a new study shows that many people underestimate their ability to get a mortgage.
The second annual How America Views Home Ownership Survey conducted by Ipsos Reid for Wells Fargo found that while 65 percent of the 2016 respondents consider owning a home an accomplishment to be proud of, they also have several troubling misconceptions about what's needed to buy a home. These misconceptions may lead wannabe home buyers to mistakenly believe they won't qualify to buy a home.
While your credit score is an important aspect of a mortgage application, it seems that many people overestimate just how high that score must be to qualify for a home loan. One of the most dramatic findings of the survey was that while 67 percent believe they need a "very good credit score", almost half (45 percent) believe a good credit score is 780 or above. In reality, scores that high are often considered excellent, and borrowers with much lower credit scores often qualify for mortgages.
Survey respondents also mistakenly believe that credit scores are a more important factor in applications than they really are. "Creditworthiness isn't determined based on a single factor, so potential homebuyers should find out what options may be available before excluding themselves based on credit score alone," said Franklin Codel, head of Mortgage Production for Wells Fargo Home Mortgages in a recent press release. Instead, your credit score is just one aspect of your credit application, which also includes your income, assets, debt-to-income ratio, loan-to-value ratio, as well as your credit history.
Down Payment Amount
Think you don't have enough money saved for a down payment to qualify for a mortgage? You aren't alone. Thirty-six percent of general survey respondents said they think you need at least 20 percent down to purchase a home, yet this rose to 58 percent of African-American respondents and 55 percent of Hispanic respondents, a notable finding as these two groups have higher proportions than average of people hoping to buy homes in the next two years. Additionally, a full 21 percent of all applicants said they didn't have enough money saved for a down payment, and this figure rose to 25 percent for African-American and Hispanic respondents.
These numbers show home buyers underestimate their ability to get mortgages based on down payment amounts, because in reality, FHA mortgages may be available with low 3.5 percent down payment options. And if you or or spouse is an active or retired military service member, you may even qualify for a 100 percent financing VA loan.
Income Requirements and Gift Money
Other areas where potential homeowners often have incorrect assumptions is when it comes to how much money you need to make to qualify for a mortgage, and whether money that has been accepted as a gift can be used for a down payment.
According to the survey, 29 percent of Hispanics and 27 percent of African-Americans agreed with the statement "Only people with high income can qualify for a mortgage," yet income is just one part of a home loan application. And while 38 percent of Hispanics and 33 percent of African-Americans believe that down payment amounts must come from the borrowers savings and not from gift money given by parents or other relatives, some lenders do allow a portion of a down payment from gifted funds.
Home ownership may not be out of your reach after all. Wondering how much you could qualify for? Use LendingTree's handy Home Affordability Calculator to find out in minutes.