A Beginner’s Guide to Mortgages

For most, a home purchase is the largest purchase they may ever make.  You either have a choice of going blindly to a bank or mortgage broker and allowing them to calculate what you can afford, or you can do the rough calculations for yourself to know approximately what you can qualify for.

Quite simply, a mortgage is a loan taken out to buy property or land.  That loan is secured against the value of your home until it is paid off.  The lender of course is going to do their due diligence on your financial health before they will lend a penny to you.

As alluded earlier, you can apply for a mortgage from either a bank or through a mortgage broker… doesn’t matter if it’s a brick and mortar local establishment or if it’s online.  If they are licensed to do business in your state, and they’ve got a good, solid reputation.  You will be required to show proof of income, provide a list of expenses and give them permission to pull your credit.

Sounds simple enough, yet not having little

Fixed Rate vs. Adjustable Rate Mortgages:

It starts at 2 basic choices in choosing a mortgage – fixed or adjustable rate.  With a fixed rate mortgage, the interest rate is the same throughout the entire loan term whereas with an adjustable rate, there is a set interest rate for a specified number of years and the rate can then adjust periodically.

There are reasons to adopt either… a fixed rate allows one to maintain a predictable mortgage payment whereas an adjustable rate initially keep the payments at a lower rate but the home is only kept for a short period of time.

The All Common 30-Year Mortgage:

The 30-yr mortgage is by far the most common term in the US market but it’s not the only option. Other loan lengths may include 10-, 20-, 25- and 40 -yr options.  It will behoove the borrower – (That’s You!) to ask your loan officer to run the other options.  Then I would advise to sneakily go online – just kidding – there’s nothing sneaky about it… go online and search for a financial calculator where you can look at the options of adding extra payments and payout your mortgage faster!

Conventional, FHA, VA, USDA & Jumbo Mortgages:

Conventional or conforming mortgages are considered as the “standard” mortgage where the loans conform to Fannie Mae and Freddie Mac’s lending limits and standards.  It is important to know that conventional mortgages are NOT guaranteed or insured by the federal government.

FHA mortgages however are insured by the federal government. They have a less stringent credit standards compared to a conventional mortgage.

VA Loans are also insured, in this case it is by the U.S. Department of Veteran Affairs.  This loan is reserved exclusively for veterans, active-duty personnel, reservists, National Guard members and in some cases, surviving spouses.  There are a wide number of benefits starting at NO down payments and less-than-perfect credit for those that meet the requirements.

USDA Loans are through the United States Department of Agriculture and are designed to encourage purchasing homes in rural areas.  They also have NO down payment requirements but may have some high fees.

Jumbo Loans are NOT guaranteed by the government but exceeds Fannie Mae and Freddie Mac lending limits.  Their interest rates are competitive with conventional loans but income, credit score and appraisal requirements can be stricter.

Many lenders have their own unique mortgage products that may be labelled under a fancy name like “Portfolio Loans” for example so by no means is the above an exhaustive list of mortgages.

Borrowing Limits:

As stated earlier, you can do the rough calculations or just go to the bank or mortgage broker and they can assist in determining your borrowing limit.  Estimations will be made to include the property taxes and insurance premiums.  There are two ratios (Debt to Income or DTI) used to determine the lending limits – front-end and back-end.

Front-End Ratio looks at the new mortgage payment (including taxes & insurance) as a percentage of your income and lenders generally look favorably at ratios of 28% or less.

Back-End Ratio looks at your mortgage plus other debt obligations as a percentage of your income and generally look favorably at ratios of 36% or less.

Down Payments:

While the industry standard for deposits may be 20% of the purchase price, one may qualify for mortgages that require a much lower amount.  For example, an FHA loan only requires 3.5% however, it requires PMI or Private Mortgage Insurance to be added to your monthly payment.  A qualified mortgage lender can assist you in finding the proper loan for your needs.

Credit Scores:

While you don’t need excellent credit, your credit score is certainly used to determine your interest rates.  Different loan programs have different minimum credit requirements.  Your Fico scores range from 300-850 where 700 and above are considered excellent.

Let’s say you’ve made some poor financial choices that has affected your credit.  Well, you are where you are and the only choice is to look at bringing it up.  If you are in a position where your credit score is just enough to get you qualified… Bravo!  However, it doesn’t mean that you can now ignore your credit history – that would be detrimental to your financial health.  Consider consulting with experts who can assist you in improving your scores.  And if kept up, you’ll find this to be extremely beneficial to your future finances.

Closing Costs:

Typically estimated between 2-5% of the purchase price.  After you find your “dream” home, your mortgage officer will provide your with the estimated costs of the loan.  In addition, the title company can also provide the estimated closing costs associated with the home which of course is swept into the loan.

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