Excluding property taxes and insurance, a traditional mortgage payment consist of two parts:
- interest on the loan, and
- payment towards the principal, or unpaid balance of the loan.
Many people are surprised to learn, however, that the amount you pay towards interest and principal varies dramatically over time. This is because mortgage loans work in such a way that the early payments are primarily interest with little reduction in principle, and the later payments are primarily towards the principal. To help calculate monthly payments for loans based on different interest rates, lenders utilize what are known as "amortization tables." These tables make it fairly easy to calculate how much of each payment will be allocated to interest, and how much goes towards the principal balance.
A full mortgage payment often includes more than just principal and interest though. Most lenders these days collect property taxes and insurance as well. This total payment is referred to as P-I-T-I (Principal, Interest, Taxes, Insurance). You lender will collect these for you as part of each monthly mortgage payment and then submit them to your insurance provider and to Multnomah county. This is to protect their interest in your property - to make sure you aren't defaulting on property taxes or not paying for insurance on their collateral (the house!).
One of the first steps to buying a home is getting the mortgage process started. The first step to getting a mortgage is to find a top mortgage broker (a.k.a., lender) or bank.
One way to find a top mortgage broker to get the mortgage process started is by doing some research online. The internet has changed how consumers in general shop for services including mortgages. A simple search of top mortgage lenders in Portland, OR will provide several pages of results to the top mortgage lenders in your area.
I am also happy to recommend to you several trusted, experienced mortgage brokers that operate in Portland. If you would like a current list, simply email me at email@example.com and I will send you a list right away.
When you first call or meet with the lender, you should be prepared to ask them a few questions. Some of the most popular questions to ask prospective mortgage lenders include;
- What type of mortgages do you offer?
- What are all the costs associated with getting a mortgage with your company?
- How long will it take for my mortgage to get approved?
- Where are your loans processed and underwritten?
Yes. It is not mandatory, but very customary and expected by most sellers. What is pre-approval? The idea is simple: Before checking out what’s on the market, you should be confident that you know how much a lender will loan you.
When you get pre-approved, your credit is pulled. This gives the lender two things: your actual credit score and a look at the data on your credit report. You need to have a credit score of 580 to qualify for a loan through the Federal Housing Administration (FHA) and a 620 for a conventional loan through Fannie Mae or Freddie Mac. A VA loan backed by the U.S. Department of Veterans Affairs doesn't require a specific score, but lenders can set guidelines themselves.
In addition to your credit score, lenders will see how much debt you’re carrying and whether you have any bankruptcies or collections on your record. If you do have something like this on your record, it’s still possible that you could get a mortgage, but you might only qualify for certain loan options.
The lender will also ask about your income and assets upfront to calculate how much you can afford based on a debt-to-income (DTI) ratio. The more information you can give your lender upfront, the stronger your pre-approval will be because both you and the seller can have confidence that your loan is more likely to be approved in the end.
Your income is verified when you give the lender your W-2s and 1040s. Bank statements also show assets. These are key in making sure you have enough reserves to make your mortgage payment for a while if you’re between jobs.
You’ll also be matched up with a preliminary loan program, although this could change later in the process.
Income and asset documentation can be provided later at the underwriting stage, but submitting it upfront will likely give you a better understanding of how much you can afford to pay.
The documentation that is required to get a mortgage will vary from buyer to buyer. For the most part however, the documentation that is required to get a mortgage will be fairly similar.
When formally applying for a mortgage, there will be some initial documentation that will be required by the mortgage lender. Documentation such as a social security card, one months pay stubs, and the past two years W-2’s are all pretty commonly asked for by a mortgage lender. The documentation will be different for buyers who are self employed as well.
Other common documentation that is requested by a mortgage lender to obtain a mortgage includes:
- Drivers license
- Bank statements
- Asset statements
- Fully executed purchase contract
- Copy of an earnest money deposit check
It’s important to understand when obtaining a mortgage that there will likely be additional documentation that will be required even after the formal mortgage application is completed. Documentation that is commonly asked for after a mortgage application is completed can include;
- Updated pay stubs
- Updated bank statements
- Verification of employment
- Gift letter for down payment (if applicable)
One of the most frequently asked questions regarding mortgages relates to deciding what type of mortgage is best. Since there are many different types of mortgages that are available for prospective home buyers, it’s important to understand which type of mortgage is best prior to signing on the dotted line. Below are three of the most popular mortgages that are available for home buyers wondering which type of mortgage is best.
Federal Housing Administration mortgages, also known as FHA mortgages, are the most popular type of financing for buyers looking to purchase a home with little money down. FHA mortgages allow a buyer to purchase a home with a minimal 3.5% down payment. FHA mortgages also allow a buyer to receive up to 6% of a homes purchase price, frequently known as sellers concessions, that can be used towards a buyers pre-paid items and closing costs.
Another reason why FHA mortgages are a very popular type of financing is because the requirements for a borrower are fairly lenient. It’s not uncommon for a potential borrower with a credit score of 600-620 to get approved for an FHA mortgage.
A conventional mortgage is a popular mortgage for prospective home buyers who have strong credit scores and who have more money available for a down payment. One of the biggest perks to obtaining a conventional mortgage is the ability to remove mortgage insurance, which cannot be removed FHA mortgages for the entire life of the loan.
Another advantage of obtaining a conventional mortgage instead of an FHA mortgage is that a seller will traditionally see a pre-approved conventional buyer stronger than a pre-approved FHA or VA buyer. This is mainly because the qualifying guidelines for conventional mortgages are more strict than FHA or VA guidelines.
Veteran Administration loans, also known as VA Loans, are another popular type of financing for Veteran buyers who meet specific qualifications. One of the primary reasons why a Veteran buyer obtains a VA Loan is because a buyer is able to finance 100% of the homes appraised value. VA loans also allow a buyer to receive seller concessions to help cover the costs associated with buying a home.
Many of these frequently asked questions about mortgages are asked by first time buyers. Since this is the case, many wonder if there are first time home buyer mortgages or programs available. There are actually many lenders who offer some great programs for first time home buyers.
For this, I highly recommend that you take a look at the non-profit website Home Opportunities NW. The site was designed specifically for the Portland area and maintains an up-to-date database of available special programs. Learn more about it by going to Home Opportunities NW Program Search.
The answer to whether a buyers interest rate will change or not is that it depends. Depending on the type of mortgage a buyer obtains can determine whether or not their interest rate will change. Mortgage products such as FHA mortgages in most cases will be a fixed rate mortgage, which means the interest rate will not change over the life of the loan.
A type of mortgage that can result in interest rate changes is known as an adjustable rate mortgage, which is also known as an ARM. An adjustable rate mortgage will typically have a set amount of time in which the interest rate is fixed. Once the fixed interest rate time is over, the rate will be subject to change. ARM’s are not very common nowadays as most buyers prefer to have the “peace of mind” of their mortgage interest rate not changing drastically, which can drastically impact a month payment.
Some buyers hear the term mortgage points and wonder what exactly they are. Paying for mortgage points is a fairly common practice. Mortgage points generally come in two variations, discount points and origination points. One point will generally cost 1% of the total amount that is mortgaged.
One benefit to purchasing mortgage points is to “buy down” an interest rate. One point will generally reduce the interest rate by .25% which can save a significant amount of money for a borrower over a 30 year term.
Paying for mortgage points can be a great idea for some buyers and not such a great idea for others. Ultimately, it’s important you understand what mortgage points are and also whether it would be beneficial to purchase points. Asking a top mortgage consultant whether you should purchase points or not is usually a good way to know if it would benefit you or not.
A very common home buying misconception that exists is that a buyer needs a boatload of money to purchase a home. This is not always the case. When a buyer asks about the amount of money needed to buy a home, the best answer is that it depends.
Like mentioned above, the amount needed for a down payment will vary from one mortgage product to another. There are other costs though involved in purchasing a home that many buyers don’t realize. In addition to the down payment, buyers also need to consider costs such as an appraisal cost, home inspection cost, and other various costs.
Other typical costs and fees associated with buying a home which can impact the amount of money needed to buy a home include;
- Mortgage processing fee
- Real estate attorney fee
- Underwriting fee
- Bank attorney fee
These costs and fees all should be taken into consideration when determining the amount of money needed to buy a home. There are many ways a buyer can purchase a home with little or no money. A mortgage consultant should provide a buyer with a breakdown of the lender costs and a real estate professional should be able to give a general idea on how much a buyer can expect to spend on the miscellaneous fees such as inspections.
The amount of time it takes for a mortgage to get approved and financed will vary from lender to lender. When shopping around for mortgages, it’s extremely important to have an idea on average how long a mortgage lender is taking to get their loans closed. A top mortgage lender should be able to get a mortgage financed within 30-45 days from application, but sometimes it can be shorter than this.
It’s important to understand that there are many factors why a mortgage approval can be delayed. While going through the process of getting a mortgage, it’s important to stay in constant contact with the lender and make sure you get any requested document to the lender as soon as possible.
If a buyer does not cooperate with the lender in getting the required documentation in a timely manner, it may end up being the reason a closing is delayed or even worse, canceled.
A bank appraisal can easily be defined as an unbiased professional opinion of a homes value. Anytime a buyer is obtaining a mortgage to purchase a home, the lender is going to require a bank appraisal be completed. A bank appraisal also is required when a homeowner decides to refinance.
There are a couple different ways a bank appraiser will determine a home’s value. The most common bank appraisal method is using the comparable property approach. This is when an appraiser will look for at least a minimum of 3 recent sales of comparable properties that have sold in the past 12 months. The appraiser will make adjustments to attempt to make the subject property as close to the comparable properties as they can. Another appraisal method that an appraiser will sometimes use is the cost per square foot approach.
It’s important to understand that there can be problems with a bank appraisal which can stop a home purchase. There are many appraisal issues that are common, such as a home value coming in lower than the sale price or the bank appraiser requiring repairs to be completed prior to the financing being approved.
The above frequently asked questions regarding mortgages are only some of the most popular questions. It’s important that whether buying or selling a home, you have a strong understanding of at least these frequently asked questions. Remember, no question is a “dumb question” when it comes to mortgages.