A mortgage is simply a loan that is used to buy your home. Mortgages are specific to purchasing real estate, but they are similar to other loans. You borrow a certain amount at a specified interest rate of interest over a number of years.
The collateral to obtain a mortgage is the real estate. If the real estate is in good condition, the bank is more likely to approve the loan. Mortgages are extremely common when purchasing a home because it is very rare that someone would have enough cash saved to purchase a home outright.
In order to qualify for a mortgage there are minimum standards that must be met like verifying enough income to cover the mortgage payment. This calculation is called the debt ratio.
There are multiple loan programs available to purchase a house. Programs like USDA, VA, FHA, Conventional, and Construction loans are available options for home buyers.
What is a mortgage?
Your purchase of a home will be among the largest, most important purchases you’ll make in your life. There are only a few things which cost as much; and, almost nothing that will affect your life as much.
As a first-time home buyer, therefore, it’s important to have a feel for how the home buying process works, and what you should expect from your mortgage.Your mortgage is the loan you will use to buy your home.
Mortgages are similar to other loans in that there is some amount borrowed; a rate of interest paid to the lender; and, a predetermined number of years over which the loan must be repaid. Just like a car loan the mortgage requires collateral. In a car loan the collateral is the car, in a mortgage, the collateral is the real estate/home.
There are a handful of loan programs available for today’s home buyers including no down payment loans; loans for buys of condominiums and townhouses; and, loans for members of the armed services (VA Loans).
Bank of England Mortgage understands that the home purchase is likely to be the largest purchase of your life. And, the largest asset. We make sure to only hire the best with an emphasis on working as an advocate for the home buyer. Our goal is to make you a client for life. We not only want to work with you but your family and friends.
Home Buying Guide
Our home buying guide will direct you through the home buying process from start to finish. Know what to expect, no matter where you are in your home buying journey.
Free Homebuyer Guide
Why do home buyers use mortgages?
Homes are a very expensive purchase. Most people cannot afford to pay cash for a home….. unless you have a winning lottery ticket.
When you do buy a home it is likely that you will seek the help of a bank or mortgage professional.
With a mortgage, the home buyer borrows money from a lender. Those monies are then used to purchase a portion of the home. The remaining portion of the home purchase is paid by the buyer.
For example, if the buyer purchases a home for $300,000 and the mortgaged amount is $270,000, the home buyer is responsible for bringing the remaining $30,000 to closing.
This $30,000 is known as the “down payment”. The remaining monies are now mortgaged to the bank, with terms which are tailored to your financial needs.
Just like every homebuyer is unique, so is every mortgage. Your loan program and terms will be discussed in detail with your mortgage professional to come up with best financial plan for your circumstances.
How do I qualify for a mortgage?
To qualify for a mortgage, you must meet certain minimum criteria, dependent on the loan program you and your mortgage professional decide on.
there are many loan types available, but the four most common are all U.S. government-backed loan programs.The four government-backed loan types are the
- conventional mortgage
- VA mortgage
- FHA mortgage
- USDA Mortgage
Each loan type is different, with varying qualification standards but the steps to getting qualified are similar in all of the loan programs.
First, you will need to meet a minimum credit score requirement. This requirement is lowest for FHA home loans; and, roughly equal among the remaining three programs.
Next, you will be asked to verify your income using W-2s, pay stubs, and federal income tax returns. Your debts will be verified, too, using a recent copy of your credit report.
If your credit report happens to include errors or omissions, which sometimes happens, you can provide documentation to your lender to correct such mistakes.
Your lender will also want to verify your employment history and your savings.
How large should my down payment be?
When you’re buying a home, the amount of money you bring to closing is known as your down payment.
You can think of your downpayment as the part of the home purchase price that you’re not borrowing from the bank.
Depending on which loan program you choose to use, your minimum downpayment will vary.
- VA loan: 0% down payment required
- USDA loan: 0% down payment required
- Conventional loan: 3% down payment required
- FHA loan: 3.5% down payment required
Keep in mind these figures are just minimums. You can choose to make a larger down payment, if you want.
When you make a larger down payment, your monthly payment is reduced because you’re borrowing less money. And, if you use a conventional loan — which many home buyers do — larger down payments are linked to lower mortgage rates.
What will my mortgage interest rate be?
Your mortgage interest rate is “made” in two parts and there’s a science that determines what rate you get from the bank.
The first part of your mortgage rate is linked to your loan program.
Of the four government-backed loan programs, VA mortgage rates are often the cheapest, beating conventional mortgage rates by as much as 40 basis points (0.40%), followed closely by USDA mortgage rates.
Next come FHA mortgage rates, followed by conventional rates.
FHA mortgage rates tend to beat conventional mortgage rates by 15 basis points (0.15%) or so, and this may look like a better deal, but price gains made on an FHA mortgage rate can be quickly gobbled up by the cost of FHA mortgage insurance.
Your lender can help you compare the relative value of an FHA loan as compared to a conventional one.
Now, once you’ve selected your loan type and have been assigned a “base” mortgage rate, it’s up to you whether you want to accept it.
Here how it works:
- Your lender quotes you a rate on your loan. Your loan requires closing costs.
- If you want a lower mortgage rate, you can opt to pay additional closing costs.
- If you want fewer closing costs, you can opt to accept a higher mortgage rate.
In this way, you can do a “zero-closing cost” mortgage. As the home buyer, you ask your lender to reduce your loan closing costs and your lender obliges in exchange for a slight increase to your mortgage rate.
In general, for loan sizes of $250,000 or more, you can get a zero-closing cost mortgage in exchange for a mortgage rate increase of 25 basis points (0.25%).
How long do I have to pay back my loan?
As the mortgage borrower, the term of your loan is also up to you. A loan “term” is the number of years until the loan must be paid-in-full.
The most common loan term for mortgage loans is 30 years. However, there are other options, too, including a 10-year term, a 15-year term, a 20-year term, and a 25-year term.
The benefits of a shorter-term loan is that your mortgage rate is typically lower, plus your loan gets paid off sooner.
These factors reduce the long-term interest costs of owning a home so, with a shorter-term loan, it actually costs less to “buy” the home you’re buying.
However, there are reasons to choose a longer-term loan, too. Namely, because mortgage repayment gets spread over a larger number of years, each payment is smaller as compared to the payment with a shorter-term loan.
The payment on a 30-year mortgage can be one-third less than the payment for a comparable 15-year term.
What will my monthly mortgage payment be?
Your monthly mortgage payment is a function of three things: the amount of money you’ve borrowed, your mortgage interest rate, and your loan term.
For borrowers using a fixed-rate mortgage, you can plug the above three figures into a mortgage calculator to calculate your monthly payment; and, you’ll know that the payment will be unchanged so long as the loan is in effect.
This is because fixed-rate mortgages are mortgage loans for which the interest rate does not change — even if market mortgage rates move higher or lower in the future.
Indeed, this is part of the appeal of a fixed-rate loan — you know exactly what your payment will be each month, which make it simpler to budget for homeownership.
The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). With an adjustable-rate mortgage, your mortgage rate — and, therefore, your mortgage payment — is subject to change.
With an adjustable-rate mortgage, your loan’s interest rate remains unchanged for a number of years, and then can vary during the remaining term of the loan.
The most common “teaser” periods for adjustable-rate loans are 5 years and 7 years. After this period ends, ARM mortgage rates can change up to once per year.
ARM loans carry a certain amount of risk so be sure to talk about the loan program in detail with your mortgage professional. The risks vs benefit analysis is a great tool Bank of England uses to compare loan programs.
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