Getting a Mortgage – Article
Mortgage Basics
Mortgages are loans used to buy a house.
The bank agrees to loan you money for a certain number of years. They charge you interest as a fee for borrowing this money. In return, you agree to make monthly payments based on how much money you borrowed, the interest rate, and the number of years for the loan.
Are you ready for a house?
You need to be financially ready to buy a house
You are legally able to buy a house once you hit your 18th birthday. However, this doesn’t mean you are ready to buy one. Since this is probably the largest amount of money you will ever borrow, you need to be financially and mentally ready for home ownership.
Make sure you have money in savings.
It’s so tempting to buy a home, especially when the monthly mortgage payment is lower than your rent. However, before you jump into home ownership, you need to have some money set aside in your savings account. Some of this money may be used for your down payment. After you buy the house, you will need other money for repairs, home improvements, and unexpected expenses.
Make sure you have a stable income.
In addition to savings, you also want to have a stable income so you are confident you can make your mortgage payments each month. A regular income helps you better understand how much you can set aside each month for a house payment and regular contributions to savings.
It’s okay to wait to buy a house
Some people may not be ready to buy a house. Others might want to save more money so they can buy a more expensive house. It is okay to take time to get mentally or financially ready to take on a mortgage and home ownership.
There are some barriers to getting a mortgage
Not everyone can easily get a mortgage, especially for their first home. Having no credit or bad credit will make it harder to get a loan. Not making payments on time, letting bills go to collections, or maxing out your credit cards are all signals to the bank that you might not be ready for a mortgage.
Finding a lender and getting prequalified for a mortgage
Getting prequalified by a bank is usually the first step in buying a house
Getting prequalified simply means that the bank has agreed to lend you a certain amount of money for your mortgage. Your realtor will want to know this amount so they can show you houses in the appropriate price range. For example, if you are prequalified for a $200,000 mortgage, your realtor will show you houses in this price range. This means your first step to home ownership is finding a mortgage lender.
You need to like your mortgage lender
There is no cost to work with a mortgage lender, but you will get the most out of the process if you like and trust your mortgage lender. This is the person who will guide you through the mortgage process and find the loan that best fits your situation. You can just walk into a bank and ask to be prequalified for a mortgage, but it does help to talk to several mortgage lenders.
Prepare to bring personal and financial information when you meet with your mortgage lender
The mortgage person needs to understand your financial picture in order to help you qualify for a loan. They will first ask for some personal information (date of birth, social security number), then start requesting information about your income and where you have lived. The bank needs to know if you have a history of paying rent on time, since this is a good indication of whether you will make your monthly mortgage payments on time. They also need to know your income so they can figure out how much your payments can be.
Expect to answer a lot of questions
Mortgage lenders will ask you a lot of questions when you apply for a mortgage. The more the bank knows about you, the better they can match you with a mortgage that best suits your situation. They are not asking questions to disqualify you from getting the loan, but instead to find the best way to help you.
The bank will give you a pre-qualification letter.
Once the bank decides to give you a mortgage, they will give you a pre-qualification letter. This letter basically says “Congratulations. You have been pre-qualified for $___. Show this letter to your realtor and start house hunting. Stop by again when you have found the house you want to buy”.
The pre-qualification letter gives you details of your loan.
The pre-qualification letter tells you three important things: 1) how much they will lend you, 2) what the interest rate for the loan will be, and 3) the number of years for the loan.
Down Payment and Monthly Payments
You may need to have money for a down payment.
A down payment is money that you have saved to help buy the house. Let’s say you want to buy a $200,000 house. The bank may lend you $190,000 and ask you to take $10,000 out of your savings to pay the rest. This means you need to have some money saved to put towards your new house.
A down payment can help you buy a more expensive house
Adding your own savings to the amount you pay for a house can help you buy a more expensive house. Let’s say the bank is willing to lend you $200,000. If you have saved $50,000 for a down payment, you can afford a $250,000 house.
A down payment can also lower your monthly mortgage payment.
Using your savings to help buy the house can lower your monthly payment. If you want to buy a $200,000 house, you can use $50,000 of your own savings and borrow the other $150,000 from the bank. Sure, the bank may have lent you the full $200,000, but since you only borrowed $150,000 your monthly payment will be significantly lower.
Some loans don’t require a down payment
There are first-time homebuyer programs for people who want to buy their first home but don’t have a down payment. Rural Development Housing Loans require very small down payments or none at all. One of the reasons your mortgage lender asks a lot of questions is to see if you would qualify for one of these loans.
Use an online mortgage calculator to see what your monthly payments will be
Every loan amount is determined by three things – the amount you borrow, the interest rate, and the number of years to pay back the loan. Click here to use the mortgage calculator to get an estimate of your monthly payment.
The bank figures out how much money they can lend you.
Once the bank decides to lend you money, they need to figure out how much to lend you. The bank walks a fine line between giving you enough money to buy your dream house but not so much money that you will have trouble paying them back. The more money they think you can repay, the more they will lend you.
You have a few options if you want to buy a more expensive home.
You have a few choices if you want to borrow more money than the bank wants to give you. You can save more money for a down payment so you don’t have to borrow as much. You can ask a relative (like mom or dad) to give you money to add to your down payment. You can increase your monthly income by getting a raise or a new job that pays more. Any of these options will help increase the amount of money the bank is willing to lend you.
Interest Rate
Know whether the interest rate is fixed or adjustable/variable
There are two types of interest rates – those that stay the same over the life of the loan (called a fixed interest rate) and those that can change (adjustable-rate mortgages or variable rate mortgages). If you have a fixed interest rate, your payment will be the same every month for 30 years. If you have an adjustable-rate mortgage (called an ARM in business lingo), your payment can increase or decrease during the 30 years.
Decide if you want a fixed or adjustable interest rate
Most first-time homebuyers like the security of having a fixed interest rate because they know what the payment will be every month. Loans with adjustable interest rates have payments that may increase or decrease. If you choose an adjustable-rate mortgage, you will need to make bigger monthly payments if the interest rate goes up in the future.
There may be a good reason to get an adjustable-rate mortgage.
Most adjustable-rate mortgages have lower interest rates for the first five years of the loan. If you are buying a starter home that you plan to sell in two years or if you know that your job will be relocating in a few years, an adjustable-rate mortgage may work well for you. Your payment will be less for the first five years of the loan, which will save you money. By the time the interest rate goes up, you will have already sold your house.
Shop around for a mortgage, but don’t be surprised if the only thing that varies is the interest rate
Every bank will tell you three things about your loan – the amount, the interest rate, and the number of years. The interest rate depends on the type of loan you are getting, especially if your mortgage lender can find a special program for your situation (like first-time homebuyer programs). The amount the banks are willing to lend you may not differ very much.
Getting the loan
Your loan will usually be for 30 years.
Most mortgage loans are for 30 years. You can ask about 10-or 15-year mortgages but paying off the loan in fewer years means that your monthly payment will be significantly higher. If you like the payments of a 30-year loan but want to pay off your mortgage faster, simply pay extra on the mortgage each month.
You won’t know the exact interest rate or loan amount until you find the house you plan to buy
Once the seller agrees to your offer for the house, the bank will finalize the interest rate and the mortgage amount. This is when you lock down the mortgage program you will use and the details of your loan.
The lender wants you to pay back the money they lent you.
You need to borrow money to buy a home. The bank wants to lend you money, but they are worried about your ability to pay them back. Your goal is to repay the money on time every month. If you don’t repay the money, the bank will take the house away from you. Since the bank really doesn’t want to do this, it is important that they trust you will repay them.
The bank technically owns your house until you finish paying off your mortgage.
The bank needs some way of guaranteeing that you will pay back the money you borrowed. This means that they hold the title to your house until the loan is completely paid off. If you can’t make the payments you agreed on when you borrowed the money, the bank will take the house back and sell it to someone else. While this doesn’t happen very often, it is something to be aware of.
The bank is there to help.
The bank will help you prepare to borrow money.
The bank can help you prepare to borrow money for a house. If you don’t have a credit card, the bank will help you get one so you can start establishing a credit history. Use your credit card instead of cash to buy things, then pay off the full balance on the credit card each month. Pay all your regular monthly bills (like utilities or phone bills) on time. Ask the bank for your credit score and talk with them about how to improve it.
Your mortgage lender is there to help you through the process.
Your lender is there to give you both good and bad news. It’s great if you easily qualify for a mortgage. If not, the lender will tell you what to do to get ready to get a loan or how to get approved for a bigger loan. Each situation is different, so your lender is there to guide you through the process.
Kaleigh Deering, Vice President and Mortgage Lender at Bangor Savings Bank, NMLS #518288
Money Matters 