Mortgages: What do you need to know?

When it comes to obtaining a primary mortgage, or mortgage refinancing, or getting a loan for a new home purchase, commercial investment property, or construction, what is all this about mortgage approval, mortgage pre Approval, and pre-qualification? One of the reasons buying a home is such an emotional experience is because not only do you have to deal with house buying, but also the mortgage process. This can be a smooth and uneventful process, or an unnerving one. Mortgage refinancing and mortgage approval in general depends on the preparation of the buyer as well as the selection of an efficient mortgage company.

General Mortgage Information

What comprises a Mortgage Payment:

1) Principal: The repayment of the original amount borrowed on a monthly basis.
2) Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
3) Taxes: Real Estate taxes paid to a local government agency.
4) Insurance: Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.

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Types of Mortgages

Fixed: A fixed term mortgage with a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of principal and interest will not change over the term of the mortgage.

Adjustable: Often referred to as an ARM (Adjustable Rate Mortgage). The interest rate on your mortgage will be adjusted up or down according to current interest rate levels. The monthly amount for your principal and interest payment will go up or down parallel to these rate fluctuations. These mortgages may include Interest Only type of loans. Recently new product lines have been introduced, most notably by Washington Mutual, called OPTION ARMs, which allow the borrower to determine the amount of the payment each month, often allowing payments less than the interest amount. These are called Negative Amortization Loans. With these loans, payments made for less than the amount of interest due result in the remaining interest amount being added to the loan amount, thus increasing the Principal owed. Borrowers should be very careful with this sort of loan.

See more discussion on this subject on the Understanding Mortgages page.

How much down payment?

One of the first questions home buyers ask regards how much down payment is needed? There is no standard answer. Down payments will vary from 0% down with a VA -- Veteran's Administration loan, or with 80/20 dual mortgages, to more than 25% with certain non-conforming loans. On average, most home buyers make down payments in the 5%-15% range. When you are calculating the amount of money required for a down payment, be sure to account for closing costs, which may total 2-5% of the mortgage value, payable in cash at the time of closing.

What is Pre qualification?

Pre qualification is the first step in securing a mortgage. Lenders analyze your income, your debt, and credit history in order to qualify you for a maximum loan amount. This gives you a clear picture of your financial parameters and a maximum housing price (the mortgage amount plus down payment). With pre approval, the lender verifies your income, debt and financial circumstances, approving the loan subject to an appraisal of the property. See the discussion below on mortgage pre qualification vs mortgage pre approval for more information.

Mortgage Pre Approval vs Pre Qualification

For mortgage refinancing, or applying for a new home purchase mortgage, being pre qualified for a mortgage loan is not the same as getting mortgage pre approval. Mortgage pre approval means that your application is taken by a certified mortgage representative and submitted for approval with either Fannie Mae (DU) or Freddie Mac (LP). This ensures your loan application has a pre-approval and will be saleable on the secondary market. Mortgage home loans need to have Fannie or Freddie approval to be purchased by conventional lenders. This is an advantage over other people offering to buy the home you want: Your Loan Is Already Approved so there is no need for the seller to worry about your ability to obtain a home loan.

Mortgage Glossary and Additional Information

If you want additional information on Mortgage terms and jargon see the Mortgage Glossary for definitions of common Mortgage terminology.

Credit Problems

Options exist for people with credit problems who want to purchase a home. See the section devoted to Credit .