The homebuying process can sometimes be complex, and many people don’t adequately educate themselves before purchasing their first homes. This is especially true when it comes to taking out a mortgage, as many Americans simply don’t know all of their options — but they should. Understanding your mortgage options can lead to better rates and terms, which can save you money over the life of the mortgage.
GOBankingRates and NBKC Bank surveyed over 1,000 Americans to learn what they know — and don’t know — about the process of getting a mortgage.
Click through to take the homebuying quiz yourself, and find out what Americans wish they knew before buying a home.
Question 1: Which of the Following Is Inaccurate About Getting a Mortgage?
Choose all that apply:
a) All mortgages require that you provide a down payment
b) Mortgage rates can be higher or lower based on where you live
c) You can find five-, three- and seven-year adjustable rate mortgages
d) You can apply for a mortgage over the phone
e) All mortgage applications require pay stubs/tax returns
f) You must be pre-approved and pre-qualified to get a mortgage
g) None of the above
Answer: A., E. and F.
All of the following statements are not true:
- All mortgages require that you provide a down payment
- All mortgage applications require pay stubs/tax returns
- You must be pre-approved and pre-qualified to get a mortgage
It’s easier to get a mortgage than most people think.
Less Than 2% of Respondents Got This Right
Only 1.5 percent of Americans knew that all three statements were false, and only 20 percent of those surveyed knew that you can get a home without a down payment.
“The No. 1 misconception when buying a home is that you have to put 20 percent down,” said military spouse and loan officer at NBKC Bank Amy Stuhr Paterson. “You potentially can put as little as no money down with a VA loan for those with a military background who are buying within the VA maximum county limits. FHA loans, for someone buying within their county limits, allow for as little as 3.5 percent down, and conventional financing allows for as little as 5 percent down.”
It’s also untrue that pay stubs or tax returns are necessary to get a mortgage.
“When applying for a mortgage, your income amount always has to be verified. However, this verification may be able to be obtained from a third party, which eliminates the need to submit pay stubs,” said Jim Schneider, former Army officer and loan officer at NBKC Bank. “Also, if you do not have self-employment or rental property income, your tax returns are almost never needed.”
Although pre-approval and pre-qualification are not required to get a mortgage, they can really help with the process, said Schneider.
“First, it helps you as a buyer focus on the appropriate price range for homes to consider,” he said. “Second, it makes your offer more attractive to a seller because you have proof that a lender has completed some preliminary work that confirms you will be able to complete the loan process.”
Question 2: Which of the Following Accurately Describes Private Mortgage Insurance (PMI)?
a) PMI is only available to veterans
b) PMI is required with all mortgages
c) PMI protects you if you stop making mortgage payments
d) If you put down less than 20 percent on a conventional loan, PMI is a consideration
e) You have to pay PMI when borrowing from a private lender
f) You pay PMI if you do not have a conventional loan
Private mortgage insurance might be a part of your mortgage loan agreement, so it’s important that you understand what it is.
Answer: D. If You Put Down Less Than 20 Percent on a Conventional Loan, PMI is a Consideration
Private mortgage insurance is insurance that you pay with a conventional loan when you put down less than the standard 20 percent. It’s a way to protect the lender if you stop making payments on your loan. PMI is usually added to your mortgage payment as part of your monthly premium.
If you do take PMI as part of your mortgage loan, it’s still possible to get rid of it down the line.
Only 27% of Respondents Got This Right
Although the correct answer was the most popular choice, nearly three-quarters of Americans did not correctly identify what PMI is.
Having PMI as part of a mortgage agreement has both benefits and drawbacks.
“From a borrower’s perspective, the one advantage of PMI is that your interest rate may be slightly lower than a loan without PMI,” said Schneider. “However, the cost of that PMI will typically be far more than any savings related to the lower rate. Another advantage is that you can purchase the home with a smaller down payment. The disadvantage is that your monthly payment will be higher due to both the larger loan amount and the added PMI payment.”
Question 3: True or False? Anyone With an Excellent Credit Score Can Get Approved for a Mortgage
Answer: B. False
Having excellent credit — a FICO score of 750 or higher — can help you get approved for a mortgage, but it’s not a guarantee.
58% of Respondents Got This Right
Most people know that having a high credit score isn’t enough to get a home loan approved.
“It takes more than a good credit score to qualify for a mortgage,” said Stuhr Paterson. “Underwriters take into consideration the debt-to-income ratio — [your] minimum monthly liabilities, including the new mortgage payment and applicable HOA dues, divided by the borrowers’ gross [pre-tax] income — and assets to confirm the borrowers’ ability to qualify for a loan.”
This also applies to people trying to qualify for government loans, including VA mortgage loans.
“VA borrowers also have to pass the residual income requirement,” said Stuhr Paterson. “Residual income is the amount the VA expects its borrowers to have left over on a monthly basis after paying their expenses, including their new mortgage payment and an estimate for utilities. The amount of required residual income is based on where the home is located and the size of the borrower’s family.”
Question 4: True or False? Sellers Typically Give Greater Consideration to Pre-Approval Letters Than Pre-Qualification Letters
It’s important to understand the difference between pre-approval and pre-qualification.
Answer: A. True
Having a pre-approval letter makes you a more attractive prospective homebuyer than someone who just has a pre-qualification letter.
66% of Respondents Got This Right
Most Americans know that pre-approval means more than pre-qualification during the homebuying process.
“A pre-approval is always a stronger document than a pre-qualification,” said Schneider. “A pre-approval can only be obtained after an underwriter has reviewed your loan application and the supporting documents, whereas a pre-qualification doesn’t require supporting documents and is only reviewed by a loan officer. Remember that ultimately it is the underwriter who issues the final approval for your loan, not the loan officer, and a pre-approval already has an underwriter involved.”
Question 5: Which of the Following Mortgages Has the Lowest Total Interest Cost?
a) 15-year fixed VA loan with 4.30% APR
b) 30-year fixed VA loan with 4.50% APR
c) Conventional 15-year fixed rate mortgage with 4.60% APR
d) Conventional 30-year fixed rate mortgage with 4.80% APR
e) A and C
f) B and D
Pay attention to both the loan term and the interest rate when choosing a mortgage loan.
Answer: A. 15-Year Fixed VA Loan with 4.30% APR
The total amount of interest you’ll pay on a home loan depends on the length of the loan and the APR you receive. Option A had the shortest loan term and the lowest APR, so you’ll end up paying the least amount of interest compared to the other hypothetical mortgages.
Only 33% of Respondents Got This Right
Two-thirds of respondents did not choose the correct answer, which seems to indicate that most Americans don’t really understand how their loan terms affect how much interest they will end up paying, or how to get the best mortgage rates.
“Typically, the shorter the term of a loan, the lower the rate,” said Schneider. “For a bank, there is less long-term market risk for a shorter loan term, and less risk always means lower rates.”
Question 6: True or False? A Second Mortgage Is a Loan You Take Out Using Your House as Collateral
Answer: A. True
It’s true that a second mortgage is a loan you take out using your house as collateral. There are pros and cons to taking out a second mortgage if you’re in need of cash.
Only 36% of Respondents Got This Right
Most Americans don’t know what a second mortgage is, so they might not know what it can be used for, or the benefits and risks associated with taking one out.
“A second mortgage may be used to access the equity in a home without disturbing the current first mortgage,” said Schneider. “For someone in need of cash, a second mortgage is usually a much less expensive way to borrow money than, say, a personal loan.”
However, it’s important to weigh the pros and cons before deciding to take on a second mortgage.
“A second mortgage is beneficial when you have a first mortgage rate that is lower than the current first mortgage rates available and you want to keep it, but still need cash from your home,” added Schneider. “A second mortgage is also often less expensive to obtain than a first mortgage in terms of fees. However, the rates on a second mortgage are often much higher than a first mortgage and can be adjustable depending on the loan type, which means they could go even higher in the future.”
Most People Are Uninformed About Homebuying
Overall, only 34 percent of Americans passed our homebuying quiz. Most people were unable to identify what’s true and false about mortgages, and don’t fully understand what PMI is or what it means to take out a second mortgage.
Before you begin the homebuying process, it’s important to take the time to learn and research how to get the best mortgage rates and the different home loans that could be available to you, such as VA home loans or FHA loans.
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This article originally appeared on GOBankingRates.com: Less Than 2% of People Got This Fact Right About Buying a Home