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What is a mortgage: Overview and FAQs

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Mortgages are one of those concepts that you hear about all the time, yet you still don’t have a complete understanding of what they are or how to get one. The good news is that with the right insight and advice, they are quite easy to understand and achieve. So follow along for an overview on mortgages that includes expert answers to all your frequently asked questions. 

A basic overview on mortgages

If you’re a mortgage newbie, it’s often helpful to achieve a basic understanding of the concept before jumping into frequently asked questions. For starters, a mortgage is a loan that is used to buy a property. You are agreeing to pay back the full amount of the loan -- plus interest -- to the lender at the risk of losing the property if you cannot repay.

While this may seem like a simple concept at first glance, it’s actually quite complex and convoluted. As a result, many first-time homebuyers are left confused and overwhelmed when trying to find and apply for a mortgage. Thankfully, we are here to help. 

Frequently asked questions about mortgages

Odds are that you still have a ton of questions about mortgages. While we cannot predict every single one, here are some of the most frequently asked questions along with helpful answers. If you have questions that aren’t covered here, feel free to reach out to the lending experts at Vaster Capital for advice that is expertly tailored to your unique situation. 

1. What is the best type of mortgage?

Unfortunately, there is no easy answer to this question. Instead, you need to take a look at all the different types of mortgages to determine which one is best for your unique financial situation. 

For instance, there are conventional mortgages and FHA mortgages. A conventional mortgage usually requires a higher credit score and down payment whereas an FHA mortgage is easier to qualify for. 

There are also 30-year mortgages and 15-year mortgages. 30-year mortgages usually come with a lower monthly payment in exchange for higher interest rates and paying more interest over the lifetime of the loan. 

There are fixed-rate mortgages and adjustable-rate mortgages. Fixed-rate mortgages maintain a single interest rate throughout the lifetime of the loan whereas adjustable-rate mortgages may have a different interest rate depending on the market and economy. 

2. How much can you afford to pay on a mortgage?

This is definitely one of the most common mortgage questions. Again, there isn’t a simple answer but many experts recommend that you follow the 28%/36% rule. This rule states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs. At the same time, you shouldn’t spend more than 36% of your gross monthly income on total debts -- including your mortgage payments, car payments, credit card payments, or student loan payments. 

3. How much do you need to save up for a down payment?

Many people falsely assume that they need to have a down payment of 20% of the home’s value to qualify for a mortgage. However, that’s not actually the case. Depending on the type of mortgage, you may be able to pay as little as 3.5% on your down payment with an FHA loan. That being said, the housing market is particularly competitive right now and many sellers are looking for buyers with higher amounts of cash to make up for appraisal gaps. Essentially, save as much as you can but don’t worry about not being able to hit that 20%. 

4. What are closings costs and how much are they?

One thing that many people don’t know about mortgages is that you have to pay closing costs before you can actually get the keys to your new home. Closing costs are the costs associated with securing your mortgage loan. 

The exact amount of your closing costs varies depending on your lender, but you can generally expect to pay anywhere between 2% and 5% of the home’s price in closing costs. Some examples of closing costs include the loan origination fee, underwriting fee, application fee, discount fee, appraisal fee, inspection fee, title insurance fee, escrow fee, and more. 

5. What is a good interest rate for a mortgage?

Your interest rate is a vital component of your mortgage. A good interest rate can save you thousands of dollars over the lifetime of your loan whereas a bad interest rate can cost you thousands of dollars over the same time period. But what is a good interest rate? 

Right now, interest rates are quite low but they are constantly changing. At the time of writing, the average interest rate for a 30-year fixed rate mortgage was 2.86%. That being said, any interest rate below 3% would be considered “good.” 

6. What is included in a mortgage payment?

So you know that interest is one component within a mortgage payment, but what about the other components? The most obvious one is principal -- the part that you’re actually paying towards the initial amount that you borrowed to purchase the home. 

In addition to principal and interest, there are also taxes and insurance. You need to pay property taxes on your home on a yearly basis that covers things like schools, police departments, fire departments, and infrastructure like roads and sewers. Property taxes vary greatly depending on where you live and this can be hard to estimate without the proper data -- so make sure that you have accurate information regarding estimated property taxes before you decide to buy a home in a certain area. 

Additionally, you are required to maintain homeowners insurance to protect your home from damage from storms, burglary, fires, etc. These four components together make up “PITI” or your total mortgage payment

7. How do you qualify for a mortgage?

Although different lenders have different qualification requirements for mortgage loans, most of them look at three primary factors: income, credit score, and debt to income ratio. Lenders want to make sure that you have a stable income to cover your monthly mortgage payments. 

Lenders also want to make sure that you have a good credit history of repaying other debts. Most lenders will want to see a credit score above 620 but an FHA allows for a credit score above 580. 

Finally, lenders want to make sure that you’re not dealing with a lot of debt. For this reason, they calculate your debt to income ratio (DTI). Generally speaking, they want to see a DTI of less than 36% -- including your mortgage payments. 

8. How do you find the best mortgage lender?

There are so many different lenders out there, so how can you find the best one? First of all, you should shop around with different lenders to get the best interest rate. Experts suggest that you shop around with at least four different lenders to find the best possible rate. 

What may seem like a small difference to you, 0.5% for example, can actually make a substantial difference in the cost of your loan over its lifetime. So before you discount small percentage differences, make sure that you have found the lowest possible rate -- even if it’s only lower by a few tenths. From there, you should make sure to “lock in” your interest rate with your chosen lender as they tend to change on a daily basis. 

Additionally, you should make sure that your lender is clear, transparent, and responsive. If you’re looking for a lender that meets all of these requirements and then some, you should definitely consider Vaster Capital

9. What documentation do you need for a mortgage?

Applying for a mortgage seemingly involves a mountain of paperwork. So what types of documentation do lenders want to see when you apply for a mortgage? Requirements may vary, but you may want to gather income statements like 1099s if you’re self-employed, W-2s, or pay stubs; bank statements; retirement account statements; tax returns; credit report; and rental history. 

Although your lender will run your credit report on their own, it often helps to have one handy to make sure that you have a favorable score and that everything on the report is correct and accurate. If not, you will need to file a dispute with the credit bureaus to correct the inaccurate information before you move forward with your mortgage application. 

Wrap up on mortgages

And there you have it -- everything you need to know about mortgages. While we tried to cover the basics and the most frequently asked questions, you may still be left with outstanding questions of your own. In this case, you should definitely reach out to the lending experts at Vaster Capital for personalized advice based on your own unique financial situation. 

 

Sources:

  1. How Much House Can I Afford? | Nerd Wallet
  2. Mortgage Understanding the Mortgage Payment Structure | Investopedia
  3. What Credit Score Do I Need to Get a Mortgage? | Experian

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