As you begin the home buying process, you will likely hear a lot of mortgages and the different options available to you. There are multiple types of mortgages that all have specific rates and requirements. Furthermore, taking out the right size mortgage is important to live comfortably and cover other home expenses. That’s why we thought a mortgage 101 guide could help.
This guide that covers everything you need to know. Learn how much house you can afford and the mortgages you should consider.
Mortgage 101: What is a mortgage?
A mortgage is a home loan. It is a lump sum of money that lenders give to potential home buyers so they can afford a house or condo. The mortgage recipient agrees to pay the loan back over a set period and with an agreed-upon interest rate.
If you take out a mortgage and stop making payments, then your lender will can take back your house. They can evict you and resell the house to recoup their lost funds. This process is called foreclosure.
This process is mortgage 101. Knowing how a mortgage works can help you work with lenders who want to avoid risk and identify the right types of mortgages for your financial situation.
Mortgage 101: What size mortgage can you afford?
One of the most common mortgage 101 questions is how much can someone afford. The first thing to know is that lenders likely won’t approve a mortgage if they don’t think you can afford it. It is too risky for them to approve a loan if they think you will default on it and fall into foreclosure. This means you will want to set a home budget ahead of time and get an idea of the size of house you can afford.
One of the most important terms when considering a mortgage size is your debt-to-income ratio. This is the amount you spend each month compared to your income. For example, if you spend $1,000 each month and earn $3,000 then your DTI is 30 percent. If you spend the same amount but earn $5,000 monthly, your DTI drops to 20 percent.
Lenders look for applications with a DTI of 36 percent on average. This allows you to accrue unplanned expenses (like a medical bill) without hurting your ability to pay your mortgage. Once you get an idea of the monthly mortgage amount you can handle, you can figure out what size home you can afford and the total loan you can apply for. There are a few online calculators you can use to figure this out.
Planning for your mortgage ahead of time can speed up the approval process and help you find a home in your budget.
Mortgage 101: Know the Different Types of Mortgage Loans
As you begin your mortgage 101 research process, you will likely encounter different loan types. There are different mortgages for various financial situations and homeownership goals. Here are a few common ones that are helpful to know.
A fixed-rate mortgage has a flat monthly payment and the same interest rate from start to finish. You can set fixed-rate mortgages at a 30-year, 15-year, or even 10-year limit. The main difference in the term is how much you pay. There will be a much lower monthly payment if you stretch your mortgage over 30 years instead of pushing to pay it off in 10.
People like fixed-rate mortgages because they can budget the same amount each year. They are the most stable and popular amongst homebuyers.
The adjustable-rate mortgage is the opposite of the fixed-rate. This means that your mortgage payment will increase every few years so you pay it off in the same amount of time as a fixed-rate option. Adjustable-rate mortgages are preferred by people who want a smaller monthly payment now in exchange for paying more later.
For example, a part-time worker and student might need a smaller mortgage now but could afford to pay more when they graduate and have a full-time job.
The FHA mortgage is insured by the Federal Housing Administration. These mortgages are meant to help people who can’t afford traditional mortgages and have limited down payment options. FHA loans also help people with low credit scores. If you want to buy a house but need to improve your financial situation, the FHA mortgage may be a strong option.
These are just three examples of mortgage options that are available to you. There are other, more complex, choices that are made for niche buyers. For example, a balloon mortgage only requires you to pay interest for a short period of time, but then the whole principal is due. A jumbo mortgage covers purchases greater than $700,000 because they are too big for the Federal Government to guarantee. In most cases, you won’t need these types of mortgages to buy a basic home.
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Is it better to go with a local bank for a mortgage?
You have multiple options when looking for a lender to secure your mortgage. There are online providers like UpNest, whichis owned by parent companyRealtor.com, which work with customers across the country. There are national banks that can help you through the mortgage process. There are also local credit unions and financial service providers who can help you secure a loan. Which one is best?
Mostly, there is no clear winner as to who offers the best mortgage options. As you search for a mortgage, check with different providers to see who can provide the funds you need. Check their interest rates and fees to understand what you will be paying. Then compare different quotes to find the best one.
That being said, some people prefer to work with their local bank to secure a mortgage. They would prefer to work with one financial institution instead of multiple and some banks offer discounts for choosing them for mortgage services. Some people prefer meeting in person with lenders and having that community connection during the application process.
You can definitely look into multiple lenders as you seek mortgage approval. However, keep in mind that your local bank might not have the best rates out there.
Mortgage 101: Can you get a mortgage under $50,000?
It is possible to get a small mortgage under $50,000. In many areas, home prices are low enough that you can get a home or a condo for less than $100,000. If you already have a downpayment then you don’t need a large mortgage.
That being said, you may have a harder time acquiring a large mortgage. Banks oftentimes won’t accept a mortgage application of $50,000 or less because they won’t turn a profit off of them. The fees and interest are so low that it isn’t considered worth their time.
From 2004 to 2011, only four percent of mortgages were for less than $50,000. This is because of home prices. For every area where $100,000 is affordable, there are more expensive cities where a small house costs four times as much.
If you want to buy an affordable home, you have a few options. You can reach out to smaller banks and local credit unions for a small mortgage. More people might lend to you then. You can also seek out a personal loan, rather than a mortgage. This would allow you to get the funds faster and make cash offers on the homes you are interested in.
You can also consider getting a larger home or putting in a smaller down payment. This will increase your mortgage rate but could also grow your equity if your home increases in value.
Start the Mortgage Process With Pre-Approval
One way to get ahead in the mortgage process is to get pre-approved. This occurs when a lender reviews your financial situation and tentatively approves a mortgage rate. The loan isn’t completely secure, but you can use a pre-approval to look at houses and make offers on ones you like.
To learn more about the pre-approval process — or to answer any mortgage 101 questions you have – contact our team at UpNest. We offer 90-minute pre-approvals and promise to offer a better rate than you can find anywhere else (or we’ll pay you for it). Apply today to get the mortgage process started.
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What is the criteria for getting a mortgage?
If you’re thinking about how to get a mortgage, you should be aware of the factors that affect your eligibility. These include:credit score, length of time in current job, current debts, whether you’re self-employed and the size of your deposit.
Is it easy to get a mortgage?
How easy is to get a mortgage as a first-time buyer?It can be very easy, and many lenders welcome first-time applicants. In fact, first-time buyers now make up the majority of home purchases (at the time of writing) with terraced houses and semi-detached properties being their preferred choices.
As an expert and enthusiast, I have access to a wide range of information and can provide insights on various topics, including mortgages. Here's some information related to the concepts mentioned in the article:
What is a mortgage?
A mortgage is a type of home loan that lenders provide to potential home buyers so they can afford to purchase a house or condo. The borrower agrees to repay the loan over a set period of time, typically with an agreed-upon interest rate. If the borrower fails to make payments, the lender has the right to take back the house through a process called foreclosure [].
What size mortgage can you afford?
Determining the size of the mortgage you can afford is an important step in the home buying process. Lenders typically assess your ability to afford a mortgage by considering your debt-to-income ratio (DTI). This ratio compares your monthly expenses to your income. Lenders generally look for a DTI of around 36 percent on average. Calculating your monthly mortgage amount can help you determine the size of the home you can afford and the total loan you can apply for [].
Different types of mortgage loans:
- Fixed-Rate Mortgage: This type of mortgage has a flat monthly payment and the same interest rate throughout the loan term. Fixed-rate mortgages can be set for 30 years, 15 years, or even 10 years. The main difference in the term is the amount you pay each month. Stretching the mortgage over a longer period, such as 30 years, results in a lower monthly payment [].
- Adjustable-Rate Mortgage: Unlike a fixed-rate mortgage, an adjustable-rate mortgage (ARM) has an interest rate that can change periodically. This means your mortgage payment may increase every few years. ARMs are preferred by those who want a smaller monthly payment initially but can afford to pay more later [].
- FHA Mortgage: The Federal Housing Administration (FHA) offers FHA mortgages, which are insured by the government. These mortgages are designed to help people who can't afford traditional mortgages or have limited down payment options. FHA loans also assist individuals with low credit scores [].
There are other types of mortgages available, such as balloon mortgages and jumbo mortgages, but these are less common and typically used for specific situations [].
Choosing a lender for a mortgage:
When looking for a lender to secure your mortgage, you have multiple options. Online providers like UpNest, national banks, local credit unions, and financial service providers can all help you secure a loan. There is no clear winner as to who offers the best mortgage options, so it's recommended to check with different providers, compare interest rates and fees, and obtain multiple quotes to find the best option for you. Some people prefer working with their local bank for the convenience and community connection, but it's important to consider that local banks may not always offer the best rates [].
Getting a mortgage under $50,000:
While it is possible to get a small mortgage under $50,000, some banks may be hesitant to accept applications for such small amounts due to the low fees and interest involved. However, smaller banks and local credit unions may be more willing to lend smaller amounts. Alternatively, you can explore personal loans as an alternative to a mortgage. It's important to consider your options and reach out to different lenders to find the best solution for your specific situation [].
Criteria for getting a mortgage:
Several factors can affect your eligibility for a mortgage, including your credit score, length of time in your current job, current debts, whether you're self-employed, and the size of your deposit [].
Ease of getting a mortgage as a first-time buyer:
Getting a mortgage as a first-time buyer can be relatively easy, as many lenders welcome first-time applicants. In fact, first-time buyers make up the majority of home purchases. Terraced houses and semi-detached properties are often preferred choices for first-time buyers [].
I hope this information helps you understand the concepts mentioned in the article. If you have any further questions, feel free to ask!