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Understanding Mortgages

ask questionsIn this series we’re examining 5 steps to turning yourself into a more successful mortgage candidate. We’ve talked about the value of research, not necessarily to become an expert on the mortgage industry, but to become an expert on your own needs and preferences. The home buying and mortgage loan financing processes can seem complex and it’s important to understand what questions to ask to get the help you need. Now it’s time to formulate those questions.

Step Two: Ask Questions

If you don’t ask, you don’t know.

Picture this. You fill out your mortgage application and submit the documentation the mortgage company needs. Things like recent pay stubs, bank statements, photo ID, tax returns, W-2s, etc. In other words, kind of personal stuff. You’re not sure exactly why they need all of that but you want the approval so you can buy your house. “Thank you, we received your documentation,” they say. You sit back and wonder if you’ll have your mortgage approval by lunchtime. 

Your first disappointment is in learning that it takes longer than a couple of hours to get through the mortgage process. Next, you learn that your intent to use that box of cash you’ve been saving up for the last year as down payment money isn’t a popular plan to the mortgage company. They’re asking whether you have other ways to pay those costs. Ways that can be documented. These misunderstandings are easily avoidable if you do some research on what happens during the mortgage process and ask questions about anything that remains unclear.

The mortgage process can go smoothly and quickly, and technology is playing a great role these days in speeding up what has been a lengthy process historically, but there are still important steps involved after you submit your application. Some of the steps have to do with documenting the security of your current financial standing and looking at your history of repaying debts. Other steps are in place to check that you aren’t trying to commit any kind of fraud or financial crime with this mortgage transaction. That may sound funny to most of us, but the mortgage industry is a big target for that sort of thing and extra caution is required.

Your loan officer and his or her team understand all of these factors and it’s their role to put your application package together completely and compliantly. The more they understand about your situation and your needs, the better they’ll be able to do that job and make sure you’re applying for the mortgage product that best fits your needs. The more you understand about how things work and what to expect, the more comfortable you’ll feel in those periods of time when you don’t have an answer yet, or when your mortgage team reaches out to you to get one more set of documents “…and quickly please.”

Your mortgage experience doesn’t have to be fraught with anxiety or delays due to misunderstandings. Ask about anything that you’re left confused or unsure over. Make sure you understand the answers you’re given. If you’re uncomfortable with anything, let your mortgage team know. And the next step and topic for next week… Accept Guidance!


Understanding Mortgages

Do the researchLet’s face it. House hunting is the fun research that most people think of when contemplating buying a home. You learn about neighborhoods. You decide on numbers of desired bedrooms and bathrooms, look at the condition of the property and weigh the importance of finishes. School districts and nearby amenities may sway your decision. You research real estate agents and the value of working with a professional or taking your chances on your own. You envision yourself living in the new home with endless sunny days filtering in through those nice big windows. Then the question comes: “Are you pre-qualified?”

Unless you plan to pay the entire amount yourself, you’re going to need to get a mortgage loan to help with your home purchase. And this, folks, is where the confidence in what to research next often runs out. At what point do you get pre-qualified? How do you judge which is the right mortgage company? What kind of mortgage program should you ask for? How much money do you need to have saved? What are the fees? Does a good interest rate require negotiation skills? How long does it take to get approved and what if you get rejected? Can you just show the mortgage company an app on your phone and walk out the same day with keys to your new home?

In this series we’ll examine 5 steps to turning yourself into a more successful mortgage candidate.

Step One: Research

The Benefits of Research

The more you understand entering into your mortgage pre-qualification, the more comfortable you’re bound to be through the mortgage approval process. Following are some areas of focus that should help you get underway.

First Things First… Where to Start

The first step in house hunting ought to be mortgage pre-qualification. Real estate agents and home owners are likely to ask you whether you’re pre-qualified because they don’t want to waste time showing you the house, or talking offers, until they know that you’re deemed capable of making a home purchase.

Understand Your Needs

The best chance a mortgage company will have of meeting your needs is if you can clearly state what they are. You don’t have to become an expert on every mortgage product out there, but you are an expert on your personal situation. That is exactly what your loan officer is looking to learn from you so they can turn around and give you solid professional guidance.

They’ll want to understand:

  • Your debt load compared to your income.
  • Your credit history.
  • What amount of monthly mortgage payment you would be able to pay consistently and comfortably.
  • How much money you have already saved to cover closing costs and down payment.
  • What is most important to you: low interest rates; low monthly payments; low down payment; using your VA benefits; not having to pay monthly mortgage insurance; not having to pay any mortgage insurance; getting assistance to buy your first home; seeing the house as a short term investment; planning to stay in the home for as long as possible; downsizing; upsizing; paying the loan off as fast as you can, etc.

It’s Okay. Play.

Mortgage calculators range from simple to complex, depending on where you look and how involved you want to get. Play around. Take a look at different ideas and get a feel for what that would mean for your wallet. It’s a good idea to keep in mind that mortgage calculators are broad brush estimating tools and may not take all of the facts into consideration. Still, in playing around, you may pick up on trends in one mortgage product or another that will help you to know what you’re looking for or inspire good questions to ask.

Mortgage Payments Calculator
Payments Calculator

How much will my payments be?

 

Affordability Calculator
Affordability Calculator

How much should I borrow?

 

Rent vs. Buy a Home Calculator
Rent vs. Buy

Should I think about buying a home instead of renting?

The more informed you are when you enter into your mortgage pre-qualification, the more you’ll be able to help get the kind of results you want. Poke around. Read up. And the next step and topic for next week… Ask Questions!


Understanding Mortgages

You’re a good comparative shopper. From the grocery store to the financial calculator, you’re sizing up your options and making the wise choice for your wallet. Naturally, when looking at whether it makes sense to rent a place or buy a home, you do your research. And when you do, you keep finding people talking about “building equity” as a good reason to buy a house. Why? What’s so special about this equity business?

What is Home Equity?

You can think of Home Equity as the amount of the property you own that’s left when you take away the amount of the debt you have against it. For example, the red section below is the home’s equity:

A mortgage is a loan where you use your property as collateral, meaning if you fail to pay your debt, you hand over your property instead. That’s called Foreclosure and is generally considered no fun so let’s imagine for this example that you do continue to pay your bills.

Every time you pay that mortgage, a portion of that money goes toward the principal balance (there are mortgage programs that don’t work like this but they’re specialized “interest only” mortgage products and we’re going to assume that you didn’t get one of those for the sake of this example). Principal Balance is a fun way of saying “the amount that you borrowed.”

So, every time you make a payment, the amount that you borrowed goes down a little bit. It’s a trickle at first, but as time goes by that widens to a stream and your principal balance really starts shrinking.

The retail value of your property (meaning how much you could sell it for) will fluctuate with the mood of the markets and home buyer seasons, but history says that eventually that value should go up. Your potential selling price goes up while the amount that you owe gets paid down. This difference is your home equity.

What Does This Have to Do Deciding Whether to Rent or Buy?

The simplest way to look at home equity is as an investment. Instead of putting your money in the stock market or a savings account, you’re investing in your property. That’s why people talk about home equity when they’re comparing renting against buying. When you rent, your money is covering someone else’s mortgage, if they have one. They are the one building equity on the property that you’re living in.

What is Home Equity Good For?

That is a question with many possible answers. Some people pay off their mortgage and live happily ever after knowing that they have that equity there should they need to draw money against it in case of an emergency, college tuitions, etc. Some people choose to draw on their equity through refinancing or adding a home equity loan or home equity line of credit, which can be less expensive options than credit cards. One person’s needs and goals will be different from the next but building equity is a nice way to keep options open in case of those life events with large dollars signs attached.

 


Understanding Mortgages

If you look around the internet you’ll see “20% down payment” mentioned a lot. That must be the standard amount of money you need to save up in order to buy a house then, right? Your bank account and savings plan may be relieved to learn that there are plenty of down payment options, and yes, you can absolutely buy a home with less than a 20% down payment.

Well then, why is everybody obsessed with 20%? The quick answer is that it’s simpler to use as an example than mortgage options with a lower down payment. 20% down payment is the typically accepted level where you can get a mortgage without needing to purchase mortgage insurance. Mortgage insurance can be paid up front and/or spread out in monthly payments, so for the sake of showing a more attractive monthly payment and lower closing costs, or just keeping things simple on a mortgage calculator, 20% tends to be a default. That’s all. Just an easier set of numbers to start with.

“What does this mean for me?”

Don’t count yourself out because your savings account isn’t close to 20% of the price tag on the home you want. Conventional mortgage loans offer 3% down payment options. Government programs like FHA, USDA-RD and VA mortgage loans allow for low down payments and in some cases, depending on eligibility factors, no down payments. You have plenty of options.

This is where it makes sense to speak with a mortgage loan officer to take a look at your options. Bring your questions and talk about your goals. Is a low down payment the most important factor or are you able to put a little more money down up front in the interest of having lower monthly payments? How do these figures line up when you add closing costs to your considerations? There is no single right answer, but once you take a look at your options you may see the solution that works best for you.


Understanding Mortgages

The inspection vs. the appraisal. They both require a professional to walk through the property. Both tend to happen early in the home purchase process. Both point out potential flaws. So, what is the difference between a home inspection and an appraisal?

Magnifying glassYou’ve chosen the home. You made an offer, it was accepted, and a contract now bears your signature. There was a section in the contract that said you intend to have an inspection done on the property. Why then is your mortgage company talking about also hiring an appraiser? In short, they’re two different services that serve very different needs.

Inspection
A property inspection primarily benefits the borrower. You hire a professional with a keen eye for trouble spots to go through the property with a figurative magnifying glass and provide you with a report of everything that could cause you grief. A property inspector isn’t going to be impressed by a new coat of paint and good furniture staging. It’s their duty to find the flaws and make you aware of what that could mean for your pocketbook or health. The inspection report is turned over to you, and depending on the findings, can be a negotiating tool between you and the seller.

Appraisal
A property appraisal is based on recent sales of similar properties in the area and informs your mortgage company of the estimated retail value (what it could sell for) of the property and also alerts them to potential areas of trouble. Since a mortgage is a loan where the house is used as collateral, the mortgage company needs to make sure that there is enough value in the property for this loan to be a good risk. Some mortgage programs also have guidelines that require certain parts of the property to be in good repair. Depending on the findings, the appraisal can also serve as a negotiating tool with the seller.

While the inspection tends to be optional, it is generally considered a good idea to purchase one so you won’t be blind-sided by costly or harmful issues that may be hidden from the common eye by a fresh coat of paint. Ultimately, that decision is yours. The appraisal is a necessary step in the mortgage process, so resign yourself to that cost. In the end, as you relax in your new home after move-in day, it can be argued that both up-front expenses were worthwhile.


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