Mortgage 101: Understanding the Basics
Unless you have a mattress full of cash or an extremely wealthy and possibly well-medicated relative who is willing to give you the funds, chances are strong that you will need to obtain a mortgage in order to purchase a home. For many people, it’s a fairly simple and easy process. This is partially due to the fact that Wilmington home prices are incredibly reasonable, compared to the rest of the country. The value that you can get here is really unbelievable!
Before I get too off-topic though, I think it’s worthwhile to mention that the sheer variety of options for financing and their various implications can make it impossible for many borrowers to make a decision.
Some important first steps to remember when seeking financing include acquiring a free credit report from a reporting agency such as Experian, ensuring that your payments with all of your current financial obligations are up to date, and avoiding taking out new lines of credit.
Many of the questions I receive from buyers are centered on down payments, closing costs, monthly payments, and preapproval amounts. Understanding the process is essential to avoiding hassles and costly mistakes, so here are a few handy bullet points about each topic.
Down Payments – The mortgage industry has changed a lot and it is now possible to purchase a home with very little to no money down. Many options start with a 1 - 3 percent down payment, with the next increments at five and 10 percent. Historically, many borrowers have preferred to put down 20 percent of the purchase price, in order to gain access to better loan terms and avoid paying mortgage insurance, which can amount to hundreds of dollars in monthly payments.
Closing Costs – These costs can be defined as the amount of money it requires to obtain a loan. The amount can vary from 0 percent - 6 percent of the purchase price, though in some cases it is possible to find a home seller who is willing to pay for all or a portion of the costs. Some of the most common closing costs include pre-paid insurance and interest, title insurance, appraisals, home inspections and lender fees.
Monthly Payment – Determining the monthly payment can be complex, as it can vary significantly from situation to situation. The variables that affect the monthly payment include the amount of down payment, interest rate, the length of the loan (longer loan terms usually have lower payments), homeowner’s insurance, taxes and mortgage insurance, if applicable.
Pre-qualified vs. Pre-approved – Many buyers have confusion about the difference between a pre-qualification and a pre-approval for a loan. While a pre-qualification can provide a pretty good idea regarding a mortgage amount and type that a borrower could potentially obtain, it’s usually a better idea to go ahead and get a pre-approval. Doing so can eliminate the guesswork from the home shopping process and help you avoid the disappointment that comes from realizing a favorite property is out of budget.
Getting a pre-approval should be everyone’s first step in shopping for a home. It requires a detailed analysis of your finances, debt-to-income ratio and credit score. Typically, the process of acquiring a pre-approval is not as cumbersome as most people think. If you have further questions about the mortgage process or would like to get a clear assessment about your purchasing power, please contact me at the number below.
The article as it appeared in the Wilmington Business Journal can be found by clicking here.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at Patrick@macmtg.com or 910-509-7105.