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Last updated: November 18, 2022 • Personal Finance

14 Common Misconceptions About Mortgages That You May Have to Explain to Your Prospect

Home buying is usually an exciting but stressful period for home buyers, especially anxious first-time homebuyers concerned with making costly mistakes or not getting the best deal.

When you add a mortgage into the equation, prospects are bound to approach the home-buying process with a lot of angst and concerns that you may need to ease before you can get their signature on those closing papers.

Here are 14 common mortgage misconceptions you may have to explain to prospects before you can close that deal:

1. You always need a deposit of 10% or more

us dollar money wooden house

The internet is full of blogs, articles, and videos telling first-time home buyers that they need a deposit of 10% or more to qualify for a mortgage for their dream home. 

This advice might be off-putting, especially for prospects who don’t have enough to cover the 10% down payment, closing costs, and moving expenses. Fortunately, this is not always the case, and not every mortgage company asks for a 10% down payment. 

For example, you can explain to first-time homebuyers that they can use SoFi mortgage loan options to get a mortgage with a down payment as low as 3%. Explaining this to anxious first-time home buyers can ease their fears and make it easier to get to the closing part of the mortgage process.

2. You have to have a perfect credit score

report credit score banking

A perfect credit score is not a prerequisite for a mortgage loan approval. However, that is not to say that having good credit doesn’t matter because the higher a prospect’s credit score, the better the mortgage terms. However, a perfect credit score is not mandatory for a mortgage, especially for first-time home buyers who can use various options at their disposal.

For example, you can explain to potentials who don’t qualify for a conventional mortgage because of not having an excellent credit score that they can consider other options like Federal Housing Administration loans. This mortgage type asks for a 3.5% deposit and a credit score as low as 580 points. With a higher deposit, prospects with 500 points on their credit score can get a mortgage option.

3. You have to be debt free to qualify

businessman pointing on transparent

Most people have one or two loans, often a student loan, a car loan, or a credit or debit card loan. Unfortunately, most people assume that having these loans automatically disqualifies them from a mortgage loan, which is only true some of the time.

Fundamentally, lenders look at a borrower’s ability to afford the new mortgage while keeping up with existing payments. They need to establish that adding an extra obligation won’t result in financial strain, increasing the risk of default.

Explain to your prospects that mortgage lenders usually consider the Debt-to-Income (DTI) ratio by summing up all monthly expenses and dividing that by the total income.

4. You need a 2-year work history

Yes, most lenders require a work history of up to 2 years. However, this is not a standard across the board. Some lenders count your education as a work history.

For example, a college graduate who lands a well-paying job right out of college and intends to use that income to buy a home can do so. That is because the education and time needed to get that job count as part of your work history in this regard.

5. You can’t pay your mortgage off early without paying a penalty

pay off your mortgage concept

Not too long ago, paying off your mortgage early attracted a prepayment penalty because it meant mortgage lenders wouldn’t earn the interest on the principal amount for the agreed period.

Fortunately, that is no longer the case because most lenders don’t charge these penalties anymore. The ones that do only levy the fee during the first 3-5 years after closing. Today, paying off a mortgage loan early is a good thing.

6: Pre-qualified is the same as pre-approved

Most prospects go into the mortgage process assuming that pre-qualification and pre-approval mean the same thing. This misconception is understandable because both processes have letters that bring prospects closer to their dream home. However, pre-qualification and pre-approval are different, and you may have to explain these differences to prospects.

Explain to prospecting mortgage clients that a pre-qualification letter indicates the potentiality of qualifying for a pre-stated mortgage loan, but only if the information on file —perhaps from a credit report— turns out accurate during the pre-approval stage.

On the other hand, mortgagees send prospects a pre-approval letter after thoroughly assessing a mortgagor’s financial history, work experience, and credit score and determining that they qualify for the pre-qualified mortgage loan. The pre-approval indicates a mortgage lender’s readiness to offer the loan, and the letter is usually valid for 60 days.

Explaining this difference to a prospect can eliminate friction and dissatisfaction with the mortgage process.

7: A long-term, 30+ years mortgage is always the best

learning about mortgage cost

When choosing a mortgage repayment plan, many people often assume that opting for the longest term is in their best interest and the only way to go. This misconception is understandable, at least from a client’s perspective: longer-term mortgages usually have lower initial monthly payments. 

However, while most mortgage lenders and banks can lend for 30 years, explain to your prospects that these mortgages often cost more in the long run because of higher interest rates. Thus, if a client can afford a shorter-term loan but is considering a longer-term mortgage, it is best to explain the advantages of both options to ensure your client can make an informed choice.

8: Adjustable-rate mortgages (ARM) are a bad deal

The fixed-rate mortgage is the traditional and most preferred option because no matter the length of the loan, the monthly payment remains fixed throughout the loan term. Thus, most people assume that ARM mortgages are a bad deal, especially after “The Financial Crisis Inquiry Report” indicated that these mortgages may have been a precursor to the 2008 housing crisis that left many homeless. However, while ARMs may have downsides, they also have notable benefits.

For example, you can explain to prospects that ARMs have a fixed period of 3, 5, and 7 years where the interest rate remains the same. After this duration, there is a cap on how high the interest rate can go.

Because ARMs don’t favor everyone, explain to your prospects that this option is ideal for short-term homeowners. For example, homebuyers who want to flip the property or intend to move can benefit from this option as the initial rates are lower than fixed-rate mortgages.

9: Too many mortgage lenders making credit score inquiries can lower credit score

focused young family couple

Most people shy away from rate-hunting because they believe having too many credit inquiries hurts their credit score. While that’s true for auto loans and credit cards, the same does not apply to a mortgage loan.

Point out to prospecting clients that while too many hard credit score inquiries can affect their credit score, it only lowers their creditworthiness by 5-10 points. After that initial inquiry, they have a 45-days rate-shopping window where similar hard credit score inquiries should not affect their credit score. 

10: A one-time mortgage denial means no future approvals

Some people are lucky enough to qualify for a mortgage on the first application; others are not as lucky. 

Unfortunately, that scares many prospects who believe that once one mortgage lender denies their mortgage application, it means no other lender will approve them in the future, which is not the case.

It is important to explain to your prospects that even if they don’t qualify for a mortgage loan this time, they can always work toward qualifying for a mortgage that helps them afford their dream house. For example, you can advise prospects to pay off debt and bills on time and utilize their credit better.

11: You need escrows for your mortgage

escrow business account concept

Homeowners who don’t like handling property insurance and taxes set up escrow accounts with their mortgage lenders, then remit an additional sum each month to ensure that, come year-end, the lender can use these funds to settle these bills.

While escrow accounts are a convenient way to handle property insurance and taxes, they are not mandatory, and you should explain to prospecting clients that if they don’t want an escrow, they do not need to have one.

12: All mortgage companies use the same approval guidelines

Most homebuyers assume that all mortgage lenders have similar SOPs. Thus, they mistakenly assume that not meeting the requirements of one lender generally disqualifies them from a mortgage elsewhere. This common misconception is false because mortgagees use different rules to pre-qualify and pre-approve potentials.

It’s important to explain your firm’s pre-qualification and pre-approval criteria to potential mortgage clients to help them prepare all the information they need to provide to improve their chances of getting approved for a mortgage.

Besides being good practice, ensuring potential homebuyers feel supported throughout the mortgage process is good for business.

13: You should find a home before applying for a mortgage

wooden house magnifying glass

This is one of the most misleading misconceptions and is why most people assume that they should house hunt first, find their dream home, and then try to qualify for a mortgage loan.

As exciting as the prospect of finding a dream home may be, it’s crucial to advise prospective mortgage clients to get pre-qualified or pre-approved for a loan before they even consider looking for a house.

Highlight why getting pre-approved—or pre-qualified, at the very least—is in the client’s best interest. For example, pre-approval means prospects can know which budget to work with to put in their offer immediately after they find their dream house.

14: You can’t get an FHA loan with good credit

fha loan concept

People commonly believe that FHA loans are for people with low credit or who haven’t saved enough for a down payment. The truth couldn’t be any further.

Yes, FHA mortgage loans are a great option for people with a lower credit score and downpayment, but that doesn’t mean these loans discriminate against anyone. The low-interest rates and lower down payment requirements make this an attractive option for everyone. Thus, homebuyers with good credit and enough money for a downpayment can take advantage of them. 


Mortgage myths can turn off potential clients who would have otherwise made great leads. If you can help potential and on-the-fence homeowner prospects weed out facts from the myths and overcome mortgage angst, you can get to closing quicker.


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