Scary word, isn’t it? “Mortgage.” It sounds like the name of a disease…and it kinda is. A mortgage is basically a fancy word for “house loan”: instead of paying for the house all at once at the beginning, you pay a little bit every month. An agency covers you for what you haven’t pain yet, and you continue to pay the mortgage until you finally own the house outright (say, 30 years later).

A monthly mortgage payment consists of:

  • Principal: repayment of the original amount borrowed.
  • Interest: the cost of borrowing the principal amount.
  • Taxes: real estate taxes.
  • Insurance: homeowners insurance.

Together, this is known as the PITI (Principal/Interest/Taxes/Insurance) payment. You may also think of it as the “Lord have PITI on my payment.”

There are several factors involved in getting a mortgage:

  • Annual income
  • Prequalification and preapproval
  • Fixed mortgage vs. adjustable mortgage
  • Down payment
  • Points
  • Locating a mortgage agency

Annual income

According to the Home Buyer’s Information Center, most buyers purchase houses that cost between 1.5 – 2.5 times their annual income. However, in some areas, there may not be houses available in that range, so you may need to spend a bit more. Keep in mind that your monthly mortgage payment should not exceed approximately 28% – 29% of your gross monthly income. That’s because your total debt payments (car, credit cards, plus the monthly mortgage, whatever) should not exceed 36% – 40% of your gross monthly income. After all, you have to eat.

Prequalification and preapproval

With these ratios in mind, it’s now time to get prequalified and preapproved for a mortgage. You may be thinking, “Why do I need a mortgage if I haven’t even looked at any houses?” It evokes the chicken and egg scenario: Which comes first? The mortgage or the house? When it comes to buying a house, you get preapproved for the mortgage first because it will determine how much you can spend. And to get preapproved, you must get prequalified (that is, you have to qualify for preapproval).

To get prequalified, you’ll need to provide your potential lender with the following information about yourself:

  • Your current income. Gather W-2s and income tax returns from the last few years, copies of pay stubs, and bank statements from savings and checking.
  • Your credit history. Credit agencies, like Trans Union, can be contacted online for a credit report. Cost averages around $8.00, though it’s free in some cases.
  • The amount of debt you’re carrying. So gather your statements for credit cards, car payments, alimony, etc.

Fixed mortgage vs. adjustable mortgage

There are two types of mortgages: fixed and adjustable.

  • On a fixed mortgage, there is a fixed term (for example, 15 to 30 years) and a fixed interest rate at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage. Taxes and insurance are not guaranteed.
  • On an adjustable mortgage, also known as an ARM (Adjustable Rate Mortgage), the interest rates are adjusted up or down according to current interest rates, established by the Federal Government. The principal and interest payment goes up and down with these rate changes as well.

Down payment

Your mortgage will also depend on the amount of your down payment (that is, how much money you’ll fork over up front). Most homebuyers make down payments of 5% – 15% of the total home price. However, you may qualify for a lower down payment because of the various types of homebuyer’s loans that are available. There are all kinds of loans to consider: first-time homebuyers loans, Veteran’s Administrations loans, HUD Loans, and FHA Loans. There may even be loans associated with the neighborhood you’re buying in to encourage more people to move into that particular area. This is another topic of discussion to have with your mortgage lender.

Points

Yet another factor to consider is the amount of points you are willing to pay with your mortgage loan. A point is 1% of your mortgage loan amount. Points are usually paid for up-front. If you can (and are willing) to pay points, then it will bring down your interest rate and potentially, your closing costs.

Locating a mortgage agency

So how do you find a financial institution to approach for a mortgage?

  • The main advice we can give here is to compare as many as you can.
  • Check your local bank or credit union, mortgage brokers and internet sites.
  • Check the current mortgage rates for your local area. These are usually listed in the Real Estate section of your local newspaper, often on Saturday or Sunday.
  • Keep in mind, whomever you choose, once they’re done prequalifying you, they’ll want to preapprove you for the highest amount your income can afford – in other words, they want you to pay as much as you can possibly afford every month. Whatever you do, don’t go out and buy a house for that amount. Buy something a bit lower. You’ll need the extra income for possible unknown expenses like closing costs, repairs, moving costs, additional furniture, lawn tools, remodeling, etc. Also consider that your monthly expenses for utilities and maintenance may go up as well.

See also…

Mortgages, Refinancing, Foreclosure