Mortgage 101 - Learn the basics of mortgage

There are many ways to finance a home. In order to make the best decision, it is important you know all your options.

Below are the most popular types of home loans. They have different requirements. Qualifying for a home loan is not difficult if you know what lenders use to measure a "good" loan. 

  • Conventional Loans - A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.

  • FHA Loans - An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans allow qualified buyers to purchase homes with low down-payment. 
  • Portfolio Loans - A portfolio loan is a loan that is serviced by the lender that issued the money. Banks have their own portfolio loan(s) with terms they set themselves. Some portfolio loans have fixed interest rates and some are variable rates (If possible, always get a fixed rate). 

Every loan has a cost. The cost is a combination of the interest rate on the loan and the closing cost(s) associated with the loan. Closing cost(s) are always due on the day of closing. Your interest rate is dependent on multiple factors, your credit history, debt-to-income, and market conditions. Your closing cost are dependent on various factors, such as, your lender, type of loan and subject property. Your closing cost include, an appraisaltitle policy, property taxes, property insurance, and a combination of lender fees

Each home loan has a credit score requirement, these credit score requirements will vary from lender to lender. The credit score & report show what percentage of total credit you are using, if any payments have been late and your overall history of repaying debt. The secret is to utilize less than 40% of your total credit available and always pay on time. 

Each home loan has a Debt-to-income (DTI) requirement. DTI is a metric used to calculate the percentage of your monthly gross income that goes to debt. In other words, out of the 100% income your receive monthly, your DTI is the percentage going to service your debt monthly (you want this percentage to be low).  It includes debt you have on your credit report, child support/alimony and your proposed home payment. It does not include food, or your leisure spending every weekend. As an example, lets say you make $4,500 in gross income monthly. Also, you have a total of $700 in monthly debt ( $350 car loan, $50 cell phone, $300 school loan ). As an example, the home you would like to purchase has a total cost of $1,200 monthly ( including: property taxes, mortgage insurance, property insurance & Home owners association). To calculate your DTI, you would take your total monthly debt, divided by your total gross monthly income. Use this example to calculate your own DTI. 

Total monthly debt = ($700 + $1,200) $1,900

Total gross monthly income = $4,500

DTI (Debt-to-income) = ($1,900 / $4,500) 42%

Each home loan has a Loan-to-value (LTV) requirement. LTV is a percentage showing how much equity and how much of the total value is debt. As an example, lets say you purchase a home for a sales price of $150,000 with a conventional loan requiring 5% down payment. Your loan amount is $142,500 after your 5% down payment. To calculate LTV, take your total loan divided by your total value of home. 

Loan-to-value (LTV) = ($142,500 / $150,000) 95%

 

Below are three very popular home loan options. Each home loan is different, the more you know about the home loan, the easier it is for you to prepare yourself. 

Conventional Loan: 

Credit Score: 620

DTI: 43%

LTV: 95%

Down payment: 5%

 

FHA Loan: 

Credit Score: 600

DTI: 56%

LTV: 96.5%

Down payment: 3.5%

 

Portfolio Loan: 

Credit Score: 580

DTI: 47%

LTV: 90%

Down payment: 10%

Due diligence: Any finance company you are working with will do their research on your application. Your income and employment information will be verified, an appraisal showing the value of the property will be ordered, a survey showing the property boundaries will be ordered and your sources of cash will be verified. The best thing to do is tell your lender your complete situation to ensure they guide you on what needs to be done to get your home loan application approved.

As a former banker and licensed mortgage lender, I am ready to guide you through all your options. Call us today, we're ready to serve you. 

MARK HANNA, REALTOR®

(956) 821 - 8001

FIRST AMERICAN REALTY CO.

(956) 682 - 3000

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