Mortgage is a fancy term for a house loan; instead of paying for the house up front, you pay a little bit every month. An agency covers you for what you haven't paid, and you continue to make mortgage payments until you finally own the house outright---in most cases, 30 years. That monthly mortgage payment, or PITI (Principal/Interest/Taxes/Insurance) payment, consists of: the principal, which is the original amount borrowed; interest, or the cost of borrowing the principal amount; real estate taxes; and homeowners insurance.
There are several factors involved in getting a mortgage:
Annual Income
According to the Home Buyer's Information Center, most buyers purchase houses that cost between 1 1/2 and 2 1/2 times their annual income. However, in some areas, there may not be houses available in that range, so you may need to spend a bit more. Keep in mind that your monthly mortgage payment should not exceed 28 to 29 percent of your gross monthly income. That's because your total debt payments, including your car and credit cards, should not exceed 36 to 40 percent of your gross monthly income. After all, you have to eat.
Prequalification and Preapproval
With these ratios in mind, you need to get prequalified and preapproved for a mortgage. When it comes to buying a house, you get preapproved for the mortgage first, because it will determine how much you can spend. And to get preapproved, you must qualify for preapproval.
To get prequalified, you'll need to provide proof of your current income, your credit history and the amount of debt you're carrying. Gather W-2s and income-tax returns from the last few years, copies of current pay stubs and bank statements, and a credit report from an agency like TransUnion (see Resources).
Fixed Mortgage vs. Adjustable Mortgage
There are two types of mortgages: fixed and adjustable.
A fixed mortgage offers a fixed interest rate for a fixed term, usually 15 or 30 years. The monthly amount for the payment of principal and interest will not change during the term of the mortgage, but taxes and insurance are not guaranteed.
On an adjustable rate mortgage (ARM), the interest rates are adjusted up or down according to current interest rates established by the federal government. The principal and interest payment go up and down with these rate changes as well.
Down Payment
Your mortgage will also depend on the amount of your down payment, or the amount of money you fork over up front. Most home buyers make down payments of 5 to 15 percent of the total home price. However, you may qualify for a lower down payment because of the various types of loans that are available, including first-time home buyer's loans, Veteran's Administration loans, HUD loans and FHA loans. There may even be loans associated with the neighborhood you're buying in, to encourage more people to move into that particular area.
Points
Yet another factor to consider is the amount of points you are willing to pay with your mortgage loan. A point is 1 percent of your mortgage loan amount. Points are usually paid for up front. If you are willing to pay points, it will bring down your interest rate, and potentially your closing costs.
Locating a Mortgage Agency
So how do you find a financial institution to approach for a mortgage? Check your local bank or credit union, mortgage brokers and Internet sites, and compare as many lenders as you can. Also keep tabs on the current mortgage rates for your area. These are usually listed in the Real Estate section of your local newspaper, often on Saturday or Sunday.
Keep in mind that whomever you choose will want to preapprove you for the highest amount your income can afford. In other words, they want you to pay as much as you can possibly afford every month. Whatever you do, don't go out and buy a house for that amount. Buy something a bit lower. You'll need the extra income for expenses like closing costs, repairs, moving costs, additional furniture, lawn tools and remodeling. Also consider that your monthly expenses for utilities and maintenance may go up as well.
