Continuity is not the first word I would use to describe real estate. In fact, the lack thereof may be one of our industry’s greatest weaknesses. While it is commonplace for there to be reasonable differences geographically why real estate may be conducted differently, there are pervasive issues that bring conflict and confusion among agents and consumers. For buyers, particularly in our local market in 2021, the onus is on them and their agents to be as readily prepared as possible and armed with the most accurate information. Dispelling common buyer’s myths help to see the forest through the trees and allows a buyer to navigate a tough market more easily.
While we won’t debunk all buyer’s myths, here are 3 of the most commonly discussed in today’s market.
You need to save 20% for a down payment to buy a home.
This is one of the longest running and most common of buyer’s myths. 20% down is essentially considered the “gold standard” down payment and there is a good reason why. A 20% down payment will ensure that you are not paying private mortgage insurance (PMI). This typically proves to be a costly addition to principal, interest, taxes, and insurance for buyers that may put undue burden on monthly payments. An agent and/or a lender should always suggest that if it fits into your financial plan to do so, you should so you can avoid paying PMI.
For some buyers, paying PMI may not carry the same burden or may be the only way for them to buy a home. The dream of home ownership may only be attainable with PMI and ultimately with a sub 20% down payment. What most buyers are unaware of is that smaller lenders often offer what is called “portfolio loans” which means that instead of one day selling them off to another lender, the loan is kept in house for the length of the loan. This means that the lending party has more flexibility on terms than what might be required of other lenders which may mean you can avoid PMI at 15% down or even lower.
There are loan programs with as little as 0% down! Physician’s loans are a speciality loan program for those in the medical field and there are other low down payment programs for veterans or those of lower socioeconomic statuses. It is important to discuss your financial position with your accountant/CPA/financial advisor and ultimately with a lender. This is free to do and should be addressed well in advance of seriously looking to purchase so you know all of your options.
Going directly through a listing agent will save costs and make the process smoother.
Looking at buyer’s myths, while it is not impossible to dispel this myth as a possibility, it is exceedingly rare for either of these points to hold water. Commissions are negotiated between a seller and their agent, and the listing agent. A percentage of commission is retained by the listing agent and cooperating compensation is offered in the event a buyer’s agent brings a qualified buyer to the table. What is not stipulated is that if there is a direct buyer that is accepted that the commission offered to a buyer’s agent is automatically forfeited by the listing agent. The commission negotiated is the commission negotiated and the listing agent, in essence, allows for a piece of that to be distributed in return for a buyer. While this could be negotiated, it is unlikely in most markets and especially in a market as seller friendly as ours.
Buyer’s agency became widely used roughly 25 years ago after it became abundantly clear that listing agents were often not treating a buyer with the same fiduciary duties they were treating the seller with. Predatory agents with established seller relationships were giving advice to buyers that favored the seller and the agent’s own commission. While the buyer’s agency worked to address this issue, it is still commonplace for agents to perform what is called dual agency. In this scenario, the agent can represent both parties while not offering full fiduciary responsibility to either. Even the most well intentioned agent can misstep here and feel more allegiance to a seller they may call a friend, family member or past client. Regardless, it is not likely to see the same level of client care from someone who is not looking out for your interest solely.
Shopping multiple lenders will cause extensive damage to my credit.
In this day and age, it is understandable that we are very cautious about our credit scores. Fraud and severe penalties for even a single missed payment makes us fearful of long lasting ramifications that could ultimately keep us from buying things like homes and cars. This predisposition makes a new buyer, particularly first time home buyers, weary of believing that a handful of credit pulls won’t impact their credit a handful of times. What us agents and lenders know is that the credit bureaus look at mortgage inquiries differently than they would a charge card credit run; we just need to get the word out there to consumers.
According to the Consumer Federal Protection Bureau (CFPB), the impact on your credit is the same regardless of the number of inquiries, as long as the inquiries are made by mortgage brokers or lenders within a 45-day window. However, it’s important to note that some companies are using older FICO models. Some older FICO models allow for just 14 days for multiple inquiries to have the impact of just one. For this reason, a good rule of thumb is to try to limit your credit pulls for rate shopping to two weeks.
Dispelling buyer’s myths before you start a serious housing search is crucial to up your chances of success. Carrying forward incorrect presumptions is both a failure to prepare for the buyer as well as their chosen agent representation. Being sure to be pre-approved through a reputable lender that offers the right rate and loan program for you is essential so don’t be nervous to do some light shopping. Once you’ve chosen the right lender for you, be sure to know your financial position and listen to advice on how to improve both your credit and your purchasing power to up your chances of finding that dream home. Finally, make sure that regardless of who is paying commission that you arm yourself with the right real estate agent for you. That doesn’t necessarily mean your best friend since middle school, the highest volume agent in your town, or anyone particular. You just need to feel confident that they are putting your needs first, have difference-making expertise and negotiation skills as well as are the right personality fit to go the distance with you. Clearing the cobwebs will lead to a higher success rate in a buyer’s search and will dampen confusion during what is likely to be the most emotional and largest purchase of your entire life.