Learning the Ropes of Mortgage Loans

Mortgage is the loan you get when purchasing a home without enough of your own cash

Pretty much with the price of housing these days, most people don’t have enough funds to write a check for possibly the largest purchase they will make in their lifetime, that will be a roof over their heads and a shelter for their family. If you’re thinking about buying a home or even just exploring the idea of homeownership, you’ve probably heard the term “mortgage” thrown around a lot. But what exactly is a mortgage?

At its simplest, a mortgage is a loan that you take out to buy a property. Whether it’s a house, a condo, or even a piece of land, a mortgage is the financing you get for Real Property aka Real Estate. The collateral for the loan is the property that is being purchased. When you take out a mortgage, you’re borrowing money from a lender, like a bank or a credit union. In exchange for the loan, you agree to pay back the money over a set period of time, usually 15 or 30 years. Each month, you’ll make a payment that includes both the principal (the amount you borrowed) and the interest (the fee you pay for borrowing the money). The interest rate you pay will depend on a number of factors, including your credit score, your income, and the current state of the housing market.

One thing to keep in mind is that when you first take out a mortgage, a lot of your monthly payment will go toward paying off the interest rather than the principal. But over time, as you continue to make your payments, more and more of your payment will go toward paying down the principal. It’s also worth noting that when you take out a mortgage, you’ll be required to put down a certain amount of money as a down payment. This is usually a percentage of the total purchase price of the property. The larger your down payment, the less you’ll need to borrow and the lower your monthly payments will be.

Calculating the amount your will pay monthly on your mortgage has several parts

A mortgage payment is a regular payment made by a borrower to a lender in order to repay a loan used to purchase a home or property. Mortgage payments are typically made monthly and consist of both principal and interest payments, as well as taxes, insurance and mortgage insurance in some cases. Total housing expense would also include any Homeowner’s Association Dues or separate assessments that run with the property you are purchasing or own.

To calculate your mortgage payment, you’ll need to know a few key pieces of information. These include:

1. The loan amount – This is the total amount of money you are borrowing to purchase your home.
2. The interest rate – This is the percentage of the loan amount that the lender charges you for borrowing the money.
3. The loan term – This is the length of time over which you will repay the loan. Common loan terms are 15, 20, or 30 years.

Once you have these pieces of information, you can use a mortgage calculator to determine your monthly mortgage payment.

It’s important to note that your actual mortgage payment may be different from the estimate provided by the calculator. This is because your monthly payment may include additional costs, such as property taxes, homeowner’s insurance, and private mortgage insurance (MI) or a monthly mortgage insurance premium (MIP) associated with the loan program that you select. More on mortgage insurance follows.

Credit Scores are used in mortgage lending as benchmarks for credit risk

The credit score is a three-digit number that represents your creditworthiness. It’s an important factor that lenders use to determine your eligibility for loans, credit cards, and other types of credit. Your credit score is based on the information in your credit report. This report includes information about your credit accounts, such as credit cards, loans, and mortgages, as well as your payment history, outstanding balances, and any missed or late payments. There are several different credit scoring models that lenders may use, but the most common is the FICO score, which ranges from 300 to 850. The higher your score, the better your creditworthiness is perceived to be.

Your credit score is calculated using a complex algorithm that takes into account several different factors, including:

• Payment history: Your track record of making on-time payments is the most important factor in determining your credit score.
• Credit utilization: This refers to the amount of credit you’re using compared to your total available credit. It’s generally recommended to keep your credit utilization below 30%.
• Length of credit history: The longer you’ve had credit accounts, the better your credit score will be.
• Types of credit: Having a mix of different types of credit, such as credit cards, loans, and a mortgage, can help improve your credit score.
• New credit: Opening several new credit accounts in a short period of time can have a negative impact on your credit score.

A high credit score can help you qualify for lower interest rates on loans and credit cards, while a low credit score can make it more difficult to get approved for credit or result in higher interest rates and fees. A mortgage lender typically uses the middle of the three scores or the lower of two – if you have only two, as the benchmark for rates and underwriting your file.

Timely payments, keeping a minimal amount of debt, but having a track record of taking it out and paying it back are all contributors to a healthy score. The longer you have, use and repay your debts the greater the increases in the score.

Mortgage Insurance is typically required when you put less than 20% down or have less than 20% equity in your home or property

Mortgage Insurance protects the lender in the event that you default. If you purchase a home and then default and the property values have dropped and the lender has to take the property from you, they too have a loss. The mortgage insurance is paid out by a separate mortgage insurance company or the government an amount to help recoup the cost and you are responsible for the premium. Simply put, mortgage insurance is a type of insurance that protects lenders in case you default on your mortgage payments. If you put down less than 20% of the purchase price as a down payment, your lender may require you to pay for mortgage insurance to protect their investment.

There are two main types of mortgage insurance: private mortgage insurance (PMI) and government-backed mortgage insurance. PMI is typically required for conventional loans, while government-backed mortgage insurance is required for FHA loans. The cost of mortgage insurance will depend on a number of factors, including the size of your down payment, your credit score, and the type of mortgage you have. You can usually expect to pay between 0.3% and 1.5% of the loan amount each year for mortgage insurance.

While mortgage insurance may seem like an added expense, it can actually be a helpful tool for getting into homeownership sooner. By allowing you to make a smaller down payment, mortgage insurance can help you buy a home even if you don’t have a large amount of cash on hand. It’s also worth noting that in most cases, you won’t need to pay mortgage insurance for the entire life of your loan. Once you’ve built up enough equity in your home, you may be able to cancel your mortgage insurance and stop paying the monthly premiums.

Qualification for a mortgage is based on information that you already have

To figure out how you qualify for a mortgage start looking at your records of your income, bank accounts and credit:

1. Check Your Credit Score: Your credit score is one of the most important factors that lenders will consider when deciding whether to approve your mortgage application. Aim to have a credit score of 680 or higher to qualify for most loans. There are lots of tools to do this out there. Do a search for free services that will give you information on your score regularly.
2. Get Your Finances in Order: Lenders will also look at your income, employment history, and debt-to-income ratio when considering your mortgage application. Make sure you have a steady income and a low level of debt to increase your chances of approval.
3. Save for a Down Payment: Most lenders require a down payment of at least 3% of the purchase price, though some may require more. Aim to save up as much as you can to reduce the amount you need to borrow.
4. Gather Documentation: When you apply for a mortgage, you’ll need to provide documentation to prove your income, employment history, and other financial information. This may include tax returns, pay stubs, bank statements, and more.
5. Shop Around: Different lenders have different requirements and interest rates, so it’s important to shop around and compare your options. Consider working with a mortgage broker to help you find the best loan for your needs.
6. Get Pre-Approved: Getting pre-approved for a mortgage can help you narrow down your home search and give you a better idea of how much you can afford. Pre-approval involves submitting an application to a lender and getting a conditional offer based on your financial information.
7. Be Prepared for Closing Costs: In addition to the down payment, you’ll need to be prepared to pay closing costs, which can include fees for the appraisal, title search, and more.
8. Go shopping: Open houses and real estate searches will help you become knowledgeable. Look at homes and get an idea of the price range that would work for you and be sure to note the property taxes for these. If you divide by 12 months on the annual, this will give you a ballpark on how much that portion of your payment will be to put in the mortgage calculator.
9. Determine the type of home that is right for you. If you are looking at condominiums note the monthly cost of the HOA dues as they will also play into your payment and qualification or if you are looking at a townhome or something in a planned community, they often also have dues to pay for amenities like recreational facilities.

In summary, qualifying for a mortgage involves getting your finances in order, checking your credit score, saving for a down payment, gathering documentation, shopping around, getting pre-approved, and being prepared for closing costs. By following these steps and working with a trusted lender, you can increase your chances of getting approved for a mortgage and finding your dream home.

The mortgage process time line can be flexible depending a number of varying events

To give you an idea of what a most expedient process might look like here is a list:

Step 1: Pre-approval

The first step in obtaining a mortgage is getting pre-approved. Pre-approval involves submitting an application and supporting documentation, including income and employment information, having your credit report pulled, and providing asset information, to a lender. The lender will then review the application and get a complete understanding of what your goals and needs are, as well as, understanding your income and assets situation. They will then usually discuss program options that seem best and run your scenario through an automated underwriting system.

The pre-approval process can take anywhere from a few hours to a few days, depending on the lender’s workload and the complexity of the application. If the file is relatively straight forward and the automated system approves it readily, then it will be on the shorter end. If there are some unique things about your loan story, the lender may send it off to an underwriter for review and come back to you with any particular items they will need to make the story complete enough to satisfy an investor. The preapproval for up to a certain loan amount or sales price is then issued. It is generally recommended that homebuyers get pre-approved before starting their home search, as it provides a clear idea of their budget and can speed up the process once an offer is made.

Step 2: Loan application

Once a homebuyer has found a property and made an offer and it has been accepted, with the contract sent to the lender, this is now officially a loan application. At this point any documents that haven’t been previously collected will be requested and submitted to underwriting. Everything provided will be dually verified. An appraisal of the property is also usually ordered to verify it’s value and a title report obtained in order to make sure that the title to the property is free to be transferred. This timeframe can be 3-40 days depending on all of the moving parts.

Step 3: Closing

Once all conditions have been signed off and all agreements between buyer and seller have been completed the file will be determined Clear to Close. Papers will be drawn by the lender and sent to Escrow (the disinterested third party that oversees the closing and distributes the funds to the appropriate parties). The final step in obtaining a mortgage is closing. Closing involves signing the loan documents and transferring ownership of the property to the borrower. From time papers are drawn to recording of the deed in the public record and disbursing all funds is anywhere from about 3-10 days depending on if everyone is available and if there are any outstanding contingencies or how fast things are moving through the system.

During the closing process, the lender will perform a final review of the loan and the property, and the borrower will sign the loan documents and pay closing costs. Once the loan is closed, the borrower officially owns the property and can move in. Total time start to finish can run anywhere from 10-60 days.

Property appraisals are ordered by the lender to confirm the value of the property being purchased

Unless you are in an unusual situation where the lender gets a property waiver from the automated system, your property is going to be appraised by a licensed professional through an Appraisal Management Company. This company oversees the appraisers and makes sure that standard processes are followed by dually licensed and qualified professionals.

A property appraisal is an evaluation of the value of a property by a licensed appraiser. This evaluation is based on various factors, including the property’s location, condition, and comparable sales in the area. The purpose of a property appraisal is to provide an objective assessment of the property’s fair market value. This value is what the property would likely sell for in an open and competitive real estate market.

During the property appraisal process, the appraiser will typically visit the property and conduct a thorough inspection. They will take note of the property’s physical condition, including its overall size, layout, and any notable features. They will also examine the property’s surroundings, such as the neighborhood, nearby schools, and access to amenities. After the inspection, the appraiser will use this information to create a detailed report that includes an estimate of the property’s value. They will compare the property to similar homes that have recently sold in the area to arrive at this estimate.

Lenders use this appraisal report to determine the value and review how it compares to the sales price. It is most common for appraisals where the value is solid to come in right at or near the actual sales price of the property. If the property’s appraised value is less than the sales price, this could result in the lender denying the loan or requiring the borrower to put down a larger down payment.

Hopefully this will have given you a framework for navigating the mortgage world, whether you are new to purchasing real estate with a mortgage or it’s just been a long time since you had to do it. Please feel free to hit the yellow bobble on the right and reach out with any questions.

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