First-Time Homebuyers: Mortgage Terms You Need to Know

When I was a kid, I remember building forts in my living room and thinking about how cool it would be when I got to buy my own real home.

 

 

I mean, how hard could it be?

 

 

Obviously, I've learned there are a few more steps to take in order to buy or refinance a home. It takes more than just gathering blankets and pillows from around the house.

Although there are a few mortgage terms that seem to really get confusing for first-time homebuyers, here's a quick guide to help grasp mortgage lingo:

Mortgage Terms 101 for First Time Homebuyers

Pre-Qualification vs. Pre-Approval

Both of these terms have that fantastic prefix pre-, noting that they will be done before something else, but these two terms are notorious for getting mixed up.

Pre-Qualification

Getting pre-qualified is like taking a brief survey based on some basic financial information, as well as potential down-payment/initial investment information. 

Lenders can provide a type of tentative green, yellow, or red light to determine your eligibility for a specific loan. 

Pre-qualification gives a strong idea as to how much of a loan can be afforded and how expensive of a house can be purchased.

Pre-Approval

Here's what really needs to be secured before beginning any home search.

A pre-approval happens when your lender gives the a-okay or the not-gonna-happen for a potential loan based on a completed application, verification of income, assets, employment check, credit history, and other necessary information.

However, once pre-approved, the real home searching fun can begin!

Getting a pre-approval can make the home buying process go much smoother.

Debt to Income (DTI) Ratio

What fun would it be to find and buy a home without adding a few mathematical equations?! 

A debt-to-income ratio is one of those basic equations used by your lender to determine whether enough money is made in order to afford the potential loan.

A simple recommendation for personal finance applies to first-time homebuyers trying to secure a home loan:

Earn more money than you spend.

When tracking a new home, I try to always remind my homebuyers that the amount of money they make must validate the amount of money they are asking to borrow.

I always recommend that anyone interested in purchasing a new home needs to have a strong idea of their DTI ratio.

Consider these financial obligations when calculating a personal DTI ratio:

  • Car payments
  • Credit card payments
  • Student/personal loans
  • Child support/alimony
  • Any other monthly financial obligations

The goal is to have as low of a DTI number as possible. That way, there will be more money available to pay a monthly mortgage.

Fixed vs Arm vs Balloon

Just looking at these three mortgage loan terms together appear ridiculous. There doesn't seem to be any connection between how they could possibly be related.

However, these three terms are the bread and butter of the mortgage industry.

Knowing the differences between the three is a much-needed ingredient to deciding which mortgage is best for each homebuyers' needs.

Here's a quick overview of each:

Fixed Rate Mortgage

  • The most popular
  • Offered between 10-40 year mortgage options, where the interest rate remains the same for the life of the loan
  • Payments are predictable

Adjustable Rate Mortgage

  • The rate of interest only remains fixed for a specific period of time (usually 1, 3, or 5 years)
  • Interest rate is lower in the beginning; adjusts at set intervals after initial period is over 
  • Interest rate adjusts to reflect market conditions (can rise or lower)
  • Payments are not always predictable

Balloon Mortgage

  • Cheaper for the first few years
  • After initial period of time, the rest of the loan is due in one lump sum, known as the balloon
  • Potentially good for buyers who are:
    • looking to move after a few years (before needing to make the balloon or lump sum payment)
    • commission-based or earners of large bonuses that can put the money towards the final balloon payment

Good Faith Estimate

Plain and simple - an estimate of the potential closing costs that a new homebuyer will pay.

Amortization

This big, fancy word is just a term to schedule how the loan will get repaid. 

This payment schedule includes how much money will go towards the principal and how much will go towards the interest.

Speaking of, here's the difference between these two terms:

Principal

The amount of money actually borrowed for the mortgage.

Interest

That percentage that the bank gets. Interest is usually the bulk of the monthly payment until it has been reached - it's the money that the bank or lender earns from the home purchase.

Escrow

A type of sub-account that is set up during closing. The escrow will include money to pay homeowner's insurance and yearly taxes, which will be wrapped into the annual mortgage payment and divided among twelve monthly payments. 

If taxes or homeowner's insurance rise, this can affect the annual and monthly payment each year.

Don't get overwhelmed!

Sure, these mortgage terms seem to be a bit confusing and at times intimidating. But, they don't have to be!

Doing a bit of homework before purchasing a new home is one of the best ways that new homebuyers can prepare for their exciting investment.

A quick checklist to remember before beginning the search for the perfect home:

  • Try to pay off as much debt as possible so a debt-to-income ratio is not massive.
  • Don't get excited about a home that cannot be afforded; don't spend more money than is earned. 
  • Get pre-approved to make the purchasing process smoother and quicker.
  • Get a good idea of a personal DTI ratio.
  • Use one of these mortgage calculators to get an idea of which type of mortgage works best for personal purchasing needs.

And my number one recommendation for anyone looking to buy a new home: Don't be afraid to ask for help! 

Making the perfect move to the perfect home doesn't have to be overwhelming or confusing!

Looking to move to the Kansas City metro area? Looking to refinance?

Let's work together to buy that dream home!

The 6 Things That Affect Your Home Loan Eligibility (Hint: You Can Fix Some of Them!)

There are few things that are more exciting than buying your first home. 

When you buy a home, you get to have the pride of ownership. You can paint the walls whatever color you want, and or update hardware and appliances without having to consult a landlord.

Best of all, unlike rent, mortgage payments actually contribute to building personal equity. In fact, many finance experts consider home ownership the key to building wealth.

That said, while purchasing a home can be a great experience, it can also be a daunting process. 

Buying a house is a huge investment. In fact, for many people, it will be the most expensive purchase they ever make in their life. 

For this reason, most buyers cannot afford to buy a home in cash. Instead, they must apply for financing. 

It can be very disheartening for would-be homeowners to get excited about a potential property, only to find that their mortgage application has been denied. The good news, however, is that there are often steps you can take to improve your home loan eligibility. 

Let's take a look at how mortgage lenders determine your eligibility for a loan.

What is home loan eligibility?

Before we look at the factors that impact your home loan eligibility, let's take a moment to define what this term means. 

Lending institutions make their profits off of the interest that borrowers pay when paying back their loans.

Whenever someone applies for a loan, the institution must decide how much money to lend that person. They also decide what interest rate to charge. They make these decisions based on how likely they believe the borrower is to make their payments on time. 

Essentially, factors that lending institutions believe make you more or less likely to make your mortgage payments will impact your eligibility for a home loan.

So what are these factors? While there are several, let's take a look at six primary ones. 

Age

One of the ways lending institutions determine a potential borrower's trustworthiness is by their age. Age can factor into a lender's decision in a few ways.

First, let's consider if a borrower is 50 years old, and looking to take out a 20-year mortgage. By the end of that loan term, the borrower would be 70 years old. 

Before approving a loan, the lender would want to know when the borrower plans to retire. Additionally, they would want to see how the borrower plans to pay back the loan during retirement. 

By contrast, folks who are further from retirement are considered to have more working years ahead of them. 

At the same time, young borrowers present other risks to lenders. Lenders may question whether a young person is sufficiently responsible for making consistent loan payments.

In order to make this determination, the lender will typically weigh age against other factors. 

Income and Profession

Monthly income is one of the best indicators of whether a borrower will be able to make loan payments. If a borrower does not have money coming in consistently, they may struggle to pay a mortgage.

In addition to your current income, lenders also look at your profession and job history. Borrowers who are in traditional professions are considered less risky because their jobs are in high demand and provide a consistent salary. 

Additionally, lenders prefer borrowers who have been in the same job or industry for two or more years. These borrowers are viewed as more stable, and more likely to continue making their current salary.

So, even if a borrower currently makes a great salary by running a start-up company, lenders might view them as a risk. For one, the borrower's income could vary significantly month to month. Or, the business could fail, and the borrower could be out of work while looking for another job. 

Credit score

Another factor affects home loan eligibility is the borrower's FICO Credit Score. Your credit score gives lenders an idea of your history of making loan payments on time. 

If you are applying for conventional financing, a better credit score will get you a better interest rate on your loan. 

If you are applying for a government-backed FHA loan, you'll likely need to meet a minimum credit score requirement. Once you meet that minimum, however, you typically won't qualify for a lower interest rate by having a great credit score.

Existing Debt

Even if you make your loan payments on time, however, your total amount of existing debt could negatively impact your home loan eligibility. 

Your total amount of income compared to your monthly debt obligations is called your debt-to-income ratio. Typically, it is recommended that your debt-to-income ratio should not be higher that 45%.

Or, put differently, you should not spend more than 45% of your monthly income on debt payments.

If your mortgage payment would put you over this threshold, lenders may be hesitant to approve the loan. 

Marital status

You've heard the expression "two heads are better than one." 

Well, when it comes to home loan eligibility, two incomes are better than one. If you and your spouse both have solid incomes, lenders will view that positively.

Even if one of you loses your job, you will have the other spouse's income to fall back on.

That said, applying for a mortgage with a spouse can be a blessing or a curse. If your spouse has poor credit, for example, that could negatively impact you. 

The condition of the property

Another factor that can affect home loan eligibility is the condition of the home itself. 

If you apply for a loan on an older home with a lot of problems, it will be harder to get approved by a bank. That's because the bank sees the home as having a higher risk of becoming uninhabitable.

If you are no longer able to live in your home, but still owe money on it, that could put you in a difficult financial situation. 

If you need help determining your home loan eligibility, contact us. Our mortgage lenders can work with you to find a financing option that will work for your situation. 

The Complete Guide to Your First Home Mortgage

Ready to take your hard earned money and hit the real estate market to find your dream home?

First, you're going to want to make sure you can afford that dream house. Enter: your first home mortgage.

A mortgage, by its nature, puts you in debt. It's also likely to be the largest debt load you'll carry.

This doesn't need to be intimidating but it does help build appreciation in what an undertaking having a mortgage is.

To qualify for a first home mortgage there are some steps you can take to ensure a smooth and relatively pain-free experience.

Know Your Credit Score

Before a lender approves you for a mortgage, it is important to know what your credit worthiness is. This is known as your credit score.

Credit scores typically range from 300-850 with 620-650 being the ideal number range to qualify. If you find yourself below this range, you'll want to address this first.

It's worth bearing in mind that the higher your credit score the better your rate will likely be.

Some ways to help better your credit score involve not carrying a balance on your credit cards or loans or having a large car loan. The sooner you can pay off your debts the more creditworthy you will get.

By addressing this first, you can save yourself the heartbreak of failing to obtain a mortgage while setting yourself up for future success.

Establish Your Capacity for Debt

Your capacity for debt is essentially how much you can realistically afford to pay toward your mortgage.

People often want the largest first home mortgage they qualify for. This can lead to some terrible financial situations. You do not want to over-leverage yourself by taking out a loan that exceeds your ability to pay it back. This is how people go bankrupt.

Be honest with yourself about your financial situation and ensure you're staying within your comfort zone.

A ballpark figure to help you understand where you sit financially is to have 41% or less of your income going toward debt. This tells lenders that you are in a solid position to pay off your debt.

Determine the Value of Your Assets

Obviously, the more money you have to go toward the purchase of your house, the larger the mortgage can be.

It's important to audit your assets to have a solid understanding of what your spending capacity is. 

You'll also want to be mindful that you aren't looking at just the amount of your downpayment, but the associated costs as well. Closing costs, legal fees, and any prepaid insurance or escrow fees will need to be covered.

The better you understand your spending position, the more confidence you install in the mortgage lender. Be sure to show them that you have considered all costs and that you're able to cover them.

The more assured the mortgage lender is, the more favorable your mortgage will be.

Have an Understanding of the Market

You don't want to approach a mortgage lender without an idea of what you want to borrow. When applying for a first home mortgage you want to be very clear about what your needs are.

Determine what you want and what you need from your house. Set a list of priorities, what the must-haves are and what the ideals are. Gather a list of potential neighborhoods that are appealing and understand what the houses there are selling for.

The more information you have the better prepared you are. This creates the context for the value of your assets and your ability to carry debt.

Having a fine grasp of your first home mortgage needs allows you to position yourself where you are and where you need to be. This allows you to bring the mortgage lender the numbers that they need to establish your qualifications.

It's also an opportunity to understand what your price point really is. You may realize that you actually have a greater purchasing power than you originally thought.

The important thing is that you don't know until you do your homework!

Get Organized

When you're establishing all the above points make sure to gather and organize all relevant paperwork. The more prepared you are for the mortgage lender, the smoother things will go.

Have a full list of your current debts so that you are aware of what you owe. Have proof of your assets together so that there are no questions as to your value. Demonstrate how you can carry the debt load you're asking for without risk.

Keeping these items organized allows you to keep a clear view of your position. If you need to refer to any of this information, you'll have it easily accessible.

Get Quotes 

Circling back to the idea that a first home mortgage is likely to be the largest debt you'll carry, you want to make sure that you are getting a favorable quote.

The difference of a percentage point on hundreds of thousands of dollars makes a massive difference when compounded over decades.

Understand the terms of your mortgage, too. Know whether you can lock in the rate and what the terms are if you need to break the contract early. Having a mortgage is a huge responsibility. The more you know about the terms of your agreement the more power you have over it.

Closing Thoughts on Getting Your First Home Mortgage

Buying a first home is an incredibly exciting experience. It can be an emotional roller-coaster full of unpredictability and uncertainty. You'll be competing with other buyers for limited properties. You'll find homes you love and homes you can live with.

With so much of the buying process out of your hands be sure to be in absolute control of the aspects you can influence.

The biggest variable you can manage is your first home mortgage. By using the above steps as a road map, you can put yourself in control of your buying power.

If you have any questions or need some advice please reach out and let us know.

7 Things You Need To Know About A Home Improvement Loan Before You Get One

Owning a home comes with all sorts of benefits, but also with many expenses.

Home improvement is popular among homeowners both because of improved quality or design, but also because it can add value to your home.

In fact, 53% of U.S. adults have made some sort of home improvement in the past year.

But with many projects costing thousands of dollars, this can be difficult to finance.

Taking out a home improvement loan is the solution for many homeowners looking to start a new project. 

Here are 7 things you need to know if you are thinking about taking out a loan for home improvement. 

1) You Have Options

When we are talking about loans, there is never just one type: there are a variety of options for you to choose from.

The first option actually isn't a loan at all: just save up money.

While this might be possible for smaller improvements, 56% of people who do home improvements spend more than $1000.

Saving up a large quantity of money might not be feasible for you or your family. 

Another option would be using a personal loan or credit card.

Lastly, you could borrow with a home equity loan, a HELOC, or a mortgage refinance.

2) How to Decide Between Loans

The route you choose should depend on what type of home improvement you are looking to do, your financial situation, and your credit.

COST

Let's look at cost of the project you are looking to do. 

For small projects, it would be best to just save and pay for it yourself.

For improvements that are $15,000 or less, like buying new appliances, for example, a credit card with low interest would likely be the best route.

As it gets a little more expensive, a personal loan would be appropriate.

If the project is $50,000 or more, you're better off going for a home equity loan, a HELOC, or refinancing.

FINANCES AND CREDIT

As I said before, your credit and financials can have an affect on whatever loan you take out.

With personal loans, the interest rate will be determined by your credit score and sometimes even your profession and your income.

It's important to look around and find which lender would have the lowest interest rate for you. 

Home equity loans are usually cheaper than personal loans and have fixed interest, while a HELOC has an adjustable-rate interest.

Oftentimes a HELOC begins with a lower rate, and can thus be cheaper, but a home equity loan has the benefit of being given in a lump sum.

It's up to your needs and priorities which you choose. 

If your renovation is large and costly, a mortgage refinance would be the way to go. This can be more expensive than the other options, so consider your financial situation carefully.

3) Know the Risks of a Home Improvement Loan

Obviously, all loans have a certain element of risk compared to just saving and spending your own money.

If you are using a credit card, be sure to get one with low or 0% interest otherwise you will end up paying extra in interest. You also need to be careful not to miss payments, as this can result in extra fees.

You also need to be wary of fees the credit card may charge you, as well as understanding that some low-interest rates eventually expire.

If you have a card that gives you a low interest for a certain amount of time, usually for around 1 year, then you should make sure to pay off the charge sooner rather than later.

As I mentioned earlier, the interest rate on a home improvement loan can depend on a variety of factors. If you have or come to have a bad credit score, you could suffer from a high-interest rate.

Finally, be wary of closing costs. Closing costs for certain loans can be quite high.

So what's the takeaway here? Do your research and understand your personal situation before committing to any of these loans. There are many apps and online calculators that can help you. 

4) You Can Combine your Options

Taking out a home improvement loan is a big decision, so it is important to borrow only what you really need.

If you have a couple thousand dollars saved, you can use that money alongside a loan instead of borrowing the entire amount. This can reduce your interest and save you money. 

5) Home Improvements Can Add Value to Your Home

If you're taking out a home improvement loan, chances are you know that it will do just that: improve your home.

But the improvements themselves can add value to a home.

So what does this mean? Let's say you spend $100,000 on your home and put $30,000 into renovations. If you then sell your home for $200,000, that means you made a $70,000 profit. 

Spending money and taking out a home improvement loan can help you make money in the long run.

6) Know What you are Looking to Add or Remodel

In order to make a profit on resale, the home improvement you make should add substantial value to your home. 

Some examples of popular renovations that add value include:

  • Landscaping
  • Maintenance (gutters, furnace, septic system, etc.)
  • Solar panels 
  • Efficient lighting, heating, and cooling
  • Kitchen or bath remodel

If you're considering a home improvement loan, these renovations could be your best bet at making your money back (and hopefully, making a profit).

7) Tax Deductions

While the home improvements themselves are not tax-deductible, there are other things related to home improvement that are deductible.

Usually, the interest on home loans and HELOCs are eligible for deduction. The specifics of the tax deduction will depend on the loan itself, your tax bracket, and other related factors. 

I talked earlier about specific types of home improvements that can add value to your home. Certain types of renovations can also lead to tax deductions.

If you have a home office for a business or rent out parts of your home, then renovations to those areas are eligible for a deduction.

Bottom Line

Home improvements can be fun and exciting for homeowners, but they are a big decision with a lot to think about.

A lot of this information can be confusing, so please reach out to us if you have any questions or need any help deciding what is right for you.