Mortgage Basics for First Time Home Buyers
Whether looking to buy a home in Iselin, New Jersey, in Colonia, in Edison, in Middlesex County or any other State, a home buyer needs to understand mortgage loans, mortgage qualifying, mortgage payment affordabilty and the mortgage application process. The reason for this is very basic: most all buyers need a mortgage loan to purchase and close on the home to be purchased!
Keeping the Explanation Very Simple!
There are three basic mortgage loans available to home buyers:
Conventional Mortgage: a mortgage loan not insured or guaranteed by any agency of the federal government
FHA Mortgage: a mortgage loan insured by the the Federal Housing Administration
VA Mortgage: a mortgage loan guaranteed by the Veterans Administration
The type of mortgage(s) available to a buyer is primarily determined by the buyer’s financial circumstances, such as amount of down payment and income. In addition, there are different down payment requirements, different mortgage qualifying guidelines, different mortgage related fees and different credit report standards with each mortgage loan.
A VA Mortgage is available to Military Veteran home buyers and requires very little or no down payment, has more liberal mortgage qualifying income and credit standards and allows the buyer to finance their closing costs. There is a VA Funding Fee, which is usually added to the mortgage. For first time users, no down payment requires a 2.15% fee, up to 10% down payment requires a 1.5% fee, and 10% or more requires a 1.25% fee.
An FHA Mortgage is available with a down payment of 3.5%. There is a Mortgage Insurance Premium(MIP), which includes an up front premium that is generally financed by the buyer and added to the mortgage and a monthly premiun which is added to the monthly mortgage payment. This mortgage insurance can be eliminated when the loan to value ratio reaches 78%.
Conventional Mortgages generally require a down payment of 20%. There are conventional mortgages available with down payments of less than 20%, but they are not as easily obtainable as they were 5 years ago. However, a conventional mortgage with less than 20% down requires Private Mortgage Insurance in the form of an upfront premium paid at closing or added to the mortgage and a monthly premium added to the monthly mortgage payment. With buyers having down payments between 10% and 20%, a conventional mortgage with PMI may be a possibilty depending on the mortgage lender. I am not aware of any lender offerring conventional mortgages with 5% down at the moment.
Fixed Rate Mortgage: a mortgage loan where the interest rate remains the same for the entire term of the loan. The most common and preferred is a 30 year loan for first time buyers. While other terms are available, the 15 year mortgage loan generally provides a slightly lower interest rate than a 30 year mortgage.
Adjustable Rate Mortgage: a mortgage loan where the interest rate adjusts at given intervals, generally one, three or five years. The initial interest rate will be lower than the a 30 year fixed rate mortgage loan, and provides the ability for a buyer to obtain a larger mortgage without increasing the initial mortgage payment. Important considerations are the interest rate adjustment caps at each interval period and for the lifetime of the loan. Home buyers need to analyze the benefits and risks involved with adjustable rate mortgage loans.
A mortgage payment consists of principal and interest, monthly real estate taxes, monthly homeowners insurance and monthly mortgage insurance premium, if applicable, and is commonly referred to as PITI.
For mortgage qualifying puposes, if there are homeowner association monthly fees, they are also considered.
Important criteria in the mortgage approval process is the analysis of a home buyer’s income, employment history, credit score and monthly debt. Of importance, income is income only if it is reported to the IRS and can be verified.
There are various lenders who provide mortgage loans to buyers who do not meet general mortgage qualifying standards and guidelines.
There are Mortgage Income Qualifying Guidelines lenders follow in the mortgage approval process, commonly referred to Mortgage Qualifying Ratios. While these guidelines vary from one mortgage type to another and sometimes from one lender to another, there is an acceptable standard a home buyer can rely on in calculating an affordable mortgage payment.
28%/36%: a monthly mortgage payment(PITI) should not exceed 28% of the the home buyers monthly gross income, commonly referred to as the front ratio; a monthly mortgage payment(PITI) plus monthly recurring debts should not exceed 36% of monthly gross income, commonly referred to as the back ratio.
There is so much more to the mortgage application and mortgage qualifying process than the basics discussed here. Mortgage standards and qualifying guidelines are always changing. Look for more information to be posted regarding the information needed for a mortgage application, the mortgage application process, closing cost charges and more. Have a question, do not be afraid to ask.
Upon making the decision to look for a home, it is extremely important for a home buyer to contact and meet with a Mortgage Representative from a bank or a mortgage company for the purpose of obtaining mortgage pre approval and getting a thorough understanding of the mortgage qualifying process. Not sure who to call? Recommendations from friends or family who recently purchased is one option, where you bank is another and the REALTOR you are planning to look at homes with is another. Need recommendations?
The mortgage application and mortgage approval process is important in a real estate purchase. It will be much more beneficial if this meeting is in person, and not simply done on the phone!