So buying a home can be a very scary and overwhelming experience. There’s a lot of terms, a lot of information that you don’t know anything about, especially getting a mortgage. This is mortgage 101. You’re not gonna be an expert but you’re gonna understand enough to buy your first house. The first step is getting pre approved.
You need to know your budget. You need to know, can I afford the house that I want in the area that I’m looking? There are lots of options when selecting a lender. A lot of them are garbage. You need someone who is transparent, honest, and timely.
I’ve had several buyers come to me already preapproved with some random lender. They didn’t even know what their estimated monthly payment was or their interest rate. That’s not okay. And if you have a lender that’s slow to respond, that’s not gonna help you win in a multiple offer situation. You need someone fast.
You should understand all the options available to you and especially the numbers. There are 4 main types of loans. 1 is a conventional and that’s what most people end up getting. It can be as low as 3% down, typically 5% down minimum, and a minimum credit score of 620. Typically with a conventional, if you’re putting less than 20% down, mortgage insurance will be required.
The next option is an FHA. With an FHA loan, you can do as little as 3 a half percent down with a credit score as low as 580, or you can put 10% down with credit score as low as 500, but not every lender offers that. There is insurance on an FHA loan too, which is for the life of the loan. It never goes away unless you’re refinancing to something else. Next up is a VA loan for veterans.
It’s not available to everyone. But there’s no down payment requirement. Credit scores can vary from lender to lender, there is a funding fee charged on top of the loan unless you’re a disabled veteran. The last option is USDA loans. It’s not available everywhere.
It’s meant for more rural areas. You can Google USDA eligibility map and you’ll see where they are and aren’t eligible, but there’s no down payment requirements. There is a 5th option and it’s gets kinda tricky. It’s what’s called portfolio lending. Basically, a given lender does not sell their loans, so they can write their own underwriting criteria and they have more flexibility.
That is kind of a bit complicated. We’ll get back to it. So in addition to your minimum down payment, there are gonna be closing costs. Expect around 2, 2 a half percent of the sales price in addition to your down payment. Depending on where you are, there may be grant programs from the state, county, private institutions to help you offset these closing costs.
And depending on where you are in the situation, this market’s competitive, so don’t get your hopes up for it. But sometimes you can get seller help to cover the cost too. Assuming you’ve got a good lender and they’re breaking down all the fees and your payment and all that, you need to understand how your payment works. The full mortgage payment is called a pity payment or p I t I, principal, interest, taxes, and insurance. I’m assuming you’re getting fixed rate.
The principal and interest portion, that’s never gonna change. Taxes and insurance though will. So the principal and interest portion, when you make your monthly payment, the lender takes it, pays off the balance, pays the interest, it’s gone. Now the taxes and insurance portion that is set aside into your escrow account. Escrow just means set aside for later use.
They collect that tax and insurance money, so come time it’s due, they just have the money to pay your tax bill and insurance. One thing you need to understand that can ultimately make or break your loan is your debt to income ratio or DTI. The DTI is your estimated monthly mortgage payment plus all your minimum monthly payments of your debts. You have student loans, credit cards, car payment, all those minimum monthly payments added with the mortgage payment, and then that number over your gross monthly income. Every loan program is gonna be a little different, but this ratio shouldn’t be any higher than about 44%.
So So let’s say that all looks good, you’re preapproved, you found a loan scenario you like, there are homes in your budget, and you go under contract. If they haven’t already, your lender’s gonna ask for a whole bunch of documents. And a lot of them may sound silly, might not make sense, but there’s a reason for it. So going back to that portfolio lending, what most lenders do is they sell their loans off to investors and there are very strict criteria for doing so. If they can’t sell the loan off, they can’t do the loan, it’s done.
It’s dead. On the back end, your lender’s running your application through what’s called an automated underwriting system. It tells them, yes, this borrower is qualified for this loan and yes, this loan can be sold. And with that approval comes a long list of documentation needed to be able to sell that loan. That’s why they ask for all these things.
And a couple things going on behind the scenes. So you’re under contract, you probably have a title company taking care of the settlement. They’re doing what’s called a title search. They’re looking at the legal history of the property. Make sure that no one can come in and say, hey.
This is actually my house. Once it’s done, your lender’s getting that, they’re reviewing it, they’re likely ordering an appraisal. It’s an assessment of value for the lender. This may come in lower than the sales price. If you’re at this point, you already know what the ramifications of that could be.
Your realtor should’ve explained that to you with how they were setting up the offer. If not, you chose a wrong realtor. If you’re buying a condo, the lender’s gonna review the condo docs. List of bylaws, budget, a whole bunch of stuff. Because for a condo, they’re not just investing in you, they are investing in the building and they wanna make sure that that building is still gonna be standing or not go bankrupt.
So a condo deal can be denied for no fault of your own if the building management is just in disarray. Doesn’t happen often, but does happen. Assuming it all looks good and you’re at the final steps, you’ll get what’s called the clear to close. That means the lender is done reviewing your file. There’s not anything else they want from you.
You’re ready to sign those papers. Couple days before closing, they’re gonna be talking to the title company just to make sure everyone has the right fees, know exactly how much money you need to bring to the table, and you’ll get wiring instructions for how to send that money. Now I mentioned before, a lot of lenders sell off their loan. They don’t hold them. All they do is originate.
You will likely get what’s called a goodbye letter saying, it was a pleasure working with you. We do not service your loan anymore. We are not gonna collect the payments. And then you’ll get a separate letter called a welcome letter from whoever they sold the loan to saying, hi. We bought your loan.
You make your payments to us now. Now before I mentioned in your monthly payment, you likely have what’s called the escrow account where taxes and insurance are set aside to pay off later. And I also mentioned taxes change over time. When they do, you will get a shortage letter. It’ll say, hey, your taxes have increased to this.
You now have a shortage and give you terms of catching up and what your new payment will be. Yes. It sucks, but it’s a matter of if not when. Another thing no one prepares you for, you’re gonna get a lot of mail. Most of it’s spam and garbage.
You just throw it away. A lot of it can be cleverly disguised to look like your lender, and it’s just some sort of scam. If you ever have any questions, call your loan officer, call the lender at that point who you know you’re making your payments to. They’ll tell you if it’s REIT or not. Lastly, something that’s on everyone’s mind, at least as of the time of making this video is, rates are pretty high.
When can I refinance? If rates do go down. 2 things to take into account when looking to refinance whenever rates come down that make sense for you. How much are you gonna save on your monthly payment? And what are the costs of doing a new loan?
If you apply for a refinance, take this into account. Take a look at the total cost of doing a loan. All the closing costs, setting up the new escrow account, the works. Then divide that by your estimated monthly savings. If it takes 2 years or less to recoup the cost of doing the new loan, it’s a good deal. If it takes 4 or 5 years, not really a good deal.