Important Facts and Myths About Mortgages That You Should Know

Buying a home is still considered part of the American dream in today's world but there's a lot of details that come into play when buying your first home. because of the current market, you may be considering buying your first home and if so this article is for you. we're going to go through the most important parts of what a mortgage is important keys to look for when getting a good deal for yourself.

What is a Mortgage?

So what does the term mortgage even mean? Obviously, a mortgage is a certain type of loan that is used on a home or property. The majority of people who buy a property or a home do it with a mortgage loan.

To get this type of loan or mortgage loan you must meet certain eligibility requirements that are very strict and are put forth by the lender themselves. What are usually looking for is a solid income are they liable payment history in the past on other debts, a debt-to-income ratio of less than 50% oh, and a credit score of 620. FHA Loans only require a 580 credit score.

So what is the difference between a loan and a mortgage?

Well, this may sound like a riddle a mortgage is a type of loan but not all loans or mortgages. A mortgage is specific because it is considered a secured loan in other words the property you're purchasing secures the loan itself. If you don't make the payments then the lender will repossess or foreclose on the mortgage and take the property back. That is their guarantee that they don't lose money on the deal.

How are mortgage-type loans put together?

The concept of a mortgage works like this, the lender will give you an amount of money to buy the property and you agree to pay back the loan with interest over many years, however, you do not actually own the home until the mortgage is completely paid off.

How much money you can borrow on a mortgage will be assessed by the potential lender it will be based on the fair market value of the home done through an appraisal as well as your current debt to income ratio and other financial obligations.

The amount of interest that you will pay is also determined by the lender and usually, two things come into play current market rates and the level of risk that the lender takes by lending you the money for the property. 

How the potential lender views you as a risk is something you have some control over it is based on your debt to income ratio as well as your credit score. If you have a credit score that's on the higher end and you have very few red flags on your credit report then the lender is going to believe you are a responsible risk. On the other side of the coin if you have a lower credit score and many red flags the potential lender may not even lend to you.

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Who is coming to the mortgage party?

Every single mortgage transaction involves two parties, the borrower and the lender.

The Lender

The financial institution or bank that loans you the money to buy a home or property is considered the lender. It could also be a credit union or even a large Mortgage Company like Quicken Loans.

Once you apply the first thing the lender will do is review your information do you make sure you initially meet their standards. Every lender has very specific requirements for the people that they will loan money to. It's very important to lenders that they only choose qualified clients who will most likely repay the mortgage. part of their process is looking through your entire financial profile which includes your credit score, your overall income, your assets and debts, your debt to income ratio, and any other Financial issues that arise.

The Borrower

The individual who is looking for a loan or mortgage is referred to as the borrower. In most cases, there is a borrower or there could be a co-borrower. In the case of a co-borrower, it would mean you're adding more than one borrower to the mortgage to increase the income which in all likelihood will allow you to qualify for a more expensive home and potentially better rates on the mortgage.

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Specific Mortgage Terms You Should Know

During the process of shopping for a home, it's likely that you will hear industry lingo that you're probably not familiar with. The following terms will make it easier for you to understand as you work through this process.

Amortization

Every time that you make a monthly payment on your mortgage a certain percentage of it will go towards paying the interest to the lender wild another part of it goes towards paying the actual loan balance which is referred to as the principal. Amortization is the term that generally means how this amount is broken down in each payment over the entire course of the loan. in most instances, the earlier payments in the earlier part of the loan have a higher part of that payment going towards the interest however as time moves forward more of each monthly payment goes towards paying down the principal of your loan.

Down Payment

The amount of money that you put down as a lump sum payment at the beginning of the mortgage is referred to as a down payment. In most cases, the amount required for the down payment will vary, however, the larger the down payment the better your loan terms and the lower your monthly payments will be. In instances where you can only pay 3% of the down payment, you'll have to pay a monthly fee which is referred to as a private mortgage insurance payment to help compensate for the small down payment. However, if you can come up with the full 20% down you'll get a much better interest rate and you will not have to pay private mortgage insurance.

Escrow

There are other issues that are required in paying for a mortgage when you purchase a home. These include property taxes and homeowners insurance. most lenders to make this process easier set up what's called an escrow account and is often managed by the lender and works in effect like a checking account. You pay a little extra each month and that little extra goes into the escrow account so when the property tax becomes due each year the money is taken out of there and when the homeowner’s insurance is due the money is taken out of there as well.

Lenders handle this because it is very important to them and then their interest that you also make these payments because if you don't and something happens to the house the insurance won't be available to cover it if you don't make the tax payment the county can come and repossess the house or put a lien on it.

However not every single mortgage or lender will set up an escrow account and if they don't you'll have to pay your property taxes and homeowners insurance bills yourself. If you have a lower than 20% down payment in most cases an escrow account is absolutely required.

Interest Rate

The percentage that you pay extra over and above and paying back the amount of money you borrowed is referred to as an interest rate. When we talk about interest rates, mortgages come with one of either two kinds of interest rates and they are the following:

Fixed Rates

A fixed-rate mortgage means that the amount that you pay percentage-wise and interest Remains the Same for the entire length of the mortgage. If you have a 20-year fixed-rate mortgage with a 3% interest rate you will pay 3% interest until you pay off the entire loan or mortgage this makes your payment very predictable each month and helps to budget.

Adjustable Rates

These types of mortgages have interest rates that change based on the changes in the marketplace. The average adjustable-rate mortgage will begin with a fixed interest rate. Which often last between 5 and 10 years. Your interest rate remains the same during this time. Once that time has passed your interest rate will move in accordance do what the market is doing. 

Loan Servicer

The company that is in charge of providing monthly mortgage statements, processing payments, managing your escrow account, and responding to your inquiry is what is referred to as the loan servicer company.

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In some cases, the company you got your mortgage from is also the same company that provides the loan servicing but that is not always the case. Many lenders sell the servicing rights of loans to two other third parties after they make the initial mortgage agreement.

Hopefully this information this article has helped spell out some of the issues that you may be confronting when deciding to purchase your first home I will help you understand the most important key factors in obtaining a mortgage.