Mortgage 101

 

Now that you’ve taken the first step toward purchasing or refinancing your home, it’s important to educate yourself on mortgage basics so you can make the best possible decision for your unique needs and financial situation. After all, purchasing or refinancing a home may be the largest financial transaction you ever make—it can feel a bit overwhelming. 

The majority of U.S. homeowners use a mortgage to finance the purchase of their homes. Typically, the home is the largest asset a family owns, and the mortgage loan is usually the largest debt. Financially understanding how the mortgage loan process works is incredibly important.

Keeping yourself informed of the basics of the mortgage process, from application to closing, makes the whole experience less stressful. With the assistance of your realtor and mortgage professional, buying a home can be an efficient, stress-free and ultimately rewarding experience.

What’s a Mortgage Loan?

Mortgage loans are the primary way people turn into homeowners. Homebuyers use mortgage loans to pay for their home or investment properties. Typically, homebuyers pay a down payment on the home, with the remainder of the payments and financing coming from the mortgage. 

As a rule of thumb, mortgages pay for about 80% of the home. Of course, there are specialized programs that may allow a mortgage to cover more of the home. After the homebuyer purchases the home with the mortgage, the homeowner makes monthly payments (of both principal and interest) to pay off the loan over time.

How Can You Get a Mortgage Loan?

The first step is to apply for a mortgage loan. After applying, you’ll be given a variety of options to continue your prospects of buying a home with a mortgage. Working with a mortgage professional through the homebuying process makes your experience much easier.

When applying for a mortgage loan, your full financial situation will be examined. Getting a mortgage loan is a big deal, and to proceed with buying a home, the lender will some information. This includes your credit score, income, debts, net worth and down payment. For more information on applying for a mortgage loan, contact us.

Important Mortgage Loan Concepts and Meanings:

To further help prepare you for terms, definitions and bank jargon used in the mortgage loan process, here are some helpful definitions you’ll need to know:

APR or APY: Annual percentage rate, or annual percentage yield. This number is the actual annual interest cost to you on your mortgage, including any fees.

Loan term: The loan term is the length of time before the entire loan amount must be paid in full. Typically, most US loan terms are 30 years.

Credit score: This is a number calculated by one of the three credit reporting agencies that represents a borrower’s credit history—and their likelihood of repaying future debts. Credit scores take into account past payment history, current debt, the type of debt (credit card debt, mortgage debt, etc.) and more. Credit scores range from 300 to 850, and under most circumstances, a score of 650 or higher is required to get a mortgage loan.

Loan-to-value ratio: This is the ratio the bank calculates to show how much down payment is paid. The loan-to-value ratio is calculated by dividing the loan amount into the appraised value of the home. Typically, a loan-to-value ratio of 80% is common for mortgage loans.

Debt-to-income ratio: This is the ratio banks use to determine a borrower’s monthly cash flow. Mortgage lenders typically use two versions of this ratio. First, they divide the borrower’s total monthly debt obligations into their total monthly income before taxes. Usually, lenders want to see a 40% or less ratio. Second, the lender does the same calculation, but instead of using all the debt payments, they’ll just use the total monthly mortgage payment. Generally, this ratio should be 30% or less.

Whether a first-time homebuyer or an experienced homeowner, there are many things to consider throughout the mortgage process—it’s also nice to have a little help along the way. Regardless if you’ve been through the home buying or refinancing process before, procedures change over time. That’s why it’s important to stay up-to-date with real estate changes and the homebuying process. We’ve compiled a list of mortgage resources below with helpful tips and information that will help you get started buying or refinancing a home.

Mortgage Resources:

Congratulations on your decision to purchase or refinance your home. Don’t forget to contact us with any questions you may have along the way—we’re here to help!