Mortgage 101

A mortgage is a loan that is secured by real estate. Your can have a mortgage on a piece of land only, on a home only or on a home on a piece of land. Mortgage education is very important to first-time home buyers so that they can learn, at least the basics, about the large investment they are about to embark on.

Getting approved for a mortgage is much more simplified than in years past. With the advances in technology and the expansion of programs, lenders are more willing to approve borrowers with less than perfect credentials.

Loan-to-Value (LTV) is one of the most basic mortgage terms. LTV is the ratio between appraised value/purchase price and loan amount. Example - $80,000 loan amount for a property worth $100,000 equals 80% LTV. The higher the LTV, the higher risk of the loan.

Debt-to-Income (DTI) ratio is another important factor. Lenders look at the "front-end" and "back-end" ratios. Front-end DTI is based upon primary housing expense divided by income. Back-end DTI is based upon all monthly debt (generally only what appears on the credit report, not utilities etc.) divided by income. Generally, the guideline for DTI is 28% front-end and 36% back-end. Some loan programs allow for higher DTIs.

Your credit score is a large determining factor in what type of loan you can apply for, and what your interest rate will be. If you have a very low score, you may only qualify for a portion of the purchase price of the home, and you would have a higher interest rate. You would be required to come up with the rest of the money on your own. If you have a high credit score, you can qualify for 100% of the value of the home, and you will also have a lower interest rate. A lower interest rate means lower payments, and therefore you will be able to afford a larger home.

An appraisal is always done on the subject property for the loan. An appraisal is a opinion of value based upon similar homes in the area. For a purchase, the LTV (see above) is based upon the lower of either appraised value or purchase price. For a refinance the LTV is based upon appraised value.

Since the profile of most mortgage loans borrowers is never perfect one thing that a loan underwriter will look for is something known as compensating factors. This refers to strength factors that affect the borrowers qualifications that compensate for weaker ones. An example might be a borrower who has a slightly higher debt to income ratio than is normally allowed but who has been working on the same job for over ten years. Since lenders like job stability, the underwriter might consider that fact a compensating factor allowing the lender to overlook the high debt to income ratio.

Beyond your basic numerical credit score the lender will have particular interest in how you have handled the payment obligations on your housing. If you already own a home, the lender will have additional qualifying based on your mortgage payment history in the last twelve to twenty four months. If you have been renting, you will most likely need to obtain what's known as a Verification of Rents. This is a form on which your landlord verifies your rental payment history for the past twelve to twenty four months.

» DISCLAIMER: The information contained in this article on 'Mortgage 101' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.