It is important to have the basic knowledge of what a mortgage is and how it works.
Let me break down for you the essential mortgage basics:
- Different types of mortgages
- Standard mortgage forms
- What is included in a mortgage
Understanding what a mortgage is and how it works is very important if you are purchasing a home, or even if you have a mortgage and are just refinancing. Many people do not have a clear understanding of how a mortgage works or even the correct terminology that they will encounter.
A mortgage is a loan that is secured by the purchase of your home. If you do not have cash to pay for a home, then you will need to get a mortgage. A mortgage is a signed contract that promises a lender that you will make the monthly payments that are required in order to repay the loan that was used to purchase your new home. If you fail to make the repayment, then your lender will put the house into foreclosure, forcing you out so that they can receive payment of the funds used to purchase the home. It is important to understand the basics of a mortgage so that you can benefit from the mortgage process and become a successful homeowner. The mortgage process can be intimidating, but it does not need to be. As long as a few key basics are understood, then the mortgage process can be less stressful.
I will be covering the following basic principles:
- Knowing the different types of mortgages
- Standard mortgage forms that you will see
- What is included in your monthly mortgage payment
- Know what an escrow account is.
- What an interest rate is and what APR means
- Mortgage points and are they worth it
There are many different types of mortgages, but the three most common mortgage programs are:
These loans can be the most difficult to qualify for, depending on your credit score. They require a minimum credit score of 640, which is the highest minimum required for mortgage loans. Conventional loans tend to be less costly, though, compared to an FHA loan.
A conventional loan can be classified as either a conforming loan or non-conforming loan. If it is conforming, then that means that your loan complies with guidelines controlled by Fannie Mae (FNMA) and Freddie Mac (FHLMC) – otherwise known as government-sponsored enterprises.
Your loan may then be sold on the secondary market. This is completely normal though and extremely common. If your loan is non-conforming, then you will often have a higher interest rate, and your loan will not be able to be sold on the secondary market. Also, non-conforming loans institutions set their own guidelines.
The Federal Housing Administration provides a variety of loan programs. FHA is also a part of HUD, the Department of Housing and Urban Development. HUD ensures that all those who live in urban areas have access to quality and affordable housing that is also inclusive.
FHA loans have a low down payment of 3.5% but can increase depending on your credit score. FHA does not require as high of a credit score like a conventional loan does. In fact, a credit score as low as 500 could potentially be approved for an FHA loan but comes at a cost and would require a minimum of 10% down.
FHA loans are popular among first time buyers because of the low credit allowed and a favorable down payment amount that is required. All FHA loans require the borrower to carry mortgage insurance on the home and roll the cost into the monthly mortgage payments.
The US Department of Veterans Affairs guarantees these loans. The VA does not make loans, but they guarantee mortgages that qualified lenders to make. To qualify, you will need to check your eligibility from the VA. The VA will issue an eligibility certificate if you qualify and you will use this to apply for a VA loan.
These loans usually come with better terms than conventional mortgages and can be a great product for our veterans.
There are 3 main forms that you will see during your mortgage process. These forms are as follows:
- When you initially apply for a mortgage, you will use what is called a Universal Loan Application, commonly known as a 1003. This is standard for every mortgage client in the United States. Many loan applicants do not fill out all of the requested information on this form, but if you want a smooth loan process, make sure all of the fields that apply to you are filled out completely. Your loan process could be delayed if it is not. The loan application will ask for your personal information such as your address, telephone number, and social security, the purpose of the loan, your income, your assets, and other information as well that will be needed to get moving with the loan process.
- Once I receive six pieces of information, I will send your LE (loan estimate) within 3 business days, which is a legal requirement. The six pieces of information that I will need are your name, your income, your social security number, the property address, estimated value of the property, and the loan amount. The LE will also go over the estimated closing costs and the loan terms. It is important to review the LE and make sure everything is correct.
- Lenders are legally required to provide you the closing disclosure (CD) three business days prior to closing. This will show every charge and all of the information for your loan on it. Make sure to go over this document and see what has changed. If done correctly, there will be minimal changes and should be very comparable to the LE. If all looks good, then you will be okay to close!
The following items are what are typically included in your monthly mortgage payment (PITI):
This is the amount you have borrowed in order to purchase your home.
This is what the lender charges so that you can obtain your mortgage.
These taxes are what you pay in property taxes for your local city and or county.
Home insurance is needed to protect your investment in your home if there are damages that may occur. It also will include your PMI (private mortgage insurance) which is required until your loan to value reaches 80%. This can be transferred into an escrow account.
An escrow account is like a savings account for your home. A portion of your monthly payment will go into this account. This can be a great tool to utilize because it will save a homeowner large out-of-pocket expenses when insurance and tax bills become due. Some lenders will require you to have an escrow account, and others will let the homeowner pay their taxes and insurance out of pocket.
Interest Rate and APR:
Many borrowers ask why the APR (annual percentage rate) is higher than the interest rate they originally picked. First, an interest rate is an amount the lender charges you to borrow the money for your home purchase. An APR includes the interest rate PLUS any other fees. These are fees that occur over the life of the loan, such as closing costs and loan fees. An APR will show the annual cost of your loan, which is why it is higher than the interest rate.
Mortgage points are an option that a borrower might want to consider if they are looking to live in their home for an extended period. You can purchase points if you’re going to lower the amount of money you pay on your loan over time. If you’re going to receive a lower interest rate, then you can buy down that rate. It will cost you upfront if you choose this route because each discount point costs 1% of the loan amount. However, each lender has its pricing in place, and can vary with how expensive it can be overall. If you are only planning on being in your home for a couple of years, buying down points may not be financially wise. Consider what year would be the break-even point so you can see the minimum amount of time you should live in the home to benefit from paying that extra cost for points fully.
You are now a mortgage expert!
Congratulations! You are now a mortgage basics expert! As you can see, there are many moving pieces as well as many different loan options.
As long as you understand how a mortgage works, you will have a successful mortgage journey. It will benefit you when further questions arise that you may have about mortgages and be diligent about knowing your mortgage and knowing what to expect when you consult with an expert.
The mortgage process follows a specific outline, and it can be challenging to understand. That is why 9x mortgage can help with your mortgage and eliminate the guesswork of finding the right financing option for you. We’re ready to help! Contact your 9x mortgage consultant with your questions and mortgage needs and we will support you every step of the way.
We look forward to serving you!