How Does a Mortgage Work?

Series Summary

Are you in the market for a home, car or renovation of some kind and need cash to get it? Well then massive bone-crushing debt is in your near future! Just kidding guys! There is good debt and there is bad debt. A home loan is great debt. You are paying off an asset with a home loan. Something that will one day be worth more than you paid for it while you are currently using it. It is a scary thought to owe so much money but with great risk comes great rewards.

Today it is easier than ever to get a loan from almost any bank. Before you go rushing off to the nearest money pit, however, there are several things you should look out for. Most banks will not loan the full value of a property so you need to have some money to put down yourself. Also, banks look at things like risk factors, credit scores and reserve money you might need in case something happens. They take into account your income and savings as well as whether you have insurance or not so that payments can still be made if you are injured or worse. There is a lot of red tape to this important step but it is definitely doable and with our expert Levi Culbertson at the helm you will be ready to get into the home of your dreams!

Video Transcript

""Mr. Culbertson, I was thinking about refinancing my house again, but I don't really know what to do. Because I have friends who have done it in the past, and a lot of people have taken advantage of them. So, please, can you give me some advice? How can I start?" "Yeah, I'd be happy to. What I'm going to get into for you are the very basics of how a mortgage works. What the banks look at. I compare it a lot to getting your car worked on at an auto mechanic. If you go to an auto mechanic and you don't know the basics of a car, it's very easy for them to take advantage of you. Not everybody does, but unfortunately it happens quite a bit. If you know the basics of how a car runs, then it's a lot more difficult for that to happen. This same thing happens in the financial industry. Alright, if I give you the basics of how the mortgage runs, or how home financing works, it'll be very difficult for people to take advantage of you. So, the first thing I'll get into, the first segment, is how a bank evaluates you as a client. Because it's very important. The first thing they're going to look at. When a bank's breaking down your eligibility to get a mortgage, the very first thing they're going to look at, or one of the first main items they're going to look at, is your income. And with your income, they're looking at something, an acronym for it is called D.T.I., which stands for debt-to-income, which is a ratio they analyze, and that's how much you have coming in gross, it's before taxes, versus how much you're required to pay out. And required to pay out, they're only looking at things on your credit report that you're supposed to pay every month. They're looking at your credit card debt, minimum payments, they're looking at your auto loans, they're looking at your mortgages. Those are the three main, or any secure loans that you have. And they're doing that because you can live without water, you can live, not really without water, but with your water getting shut off, you can still live. You can still live with your electricity shut off. But, as far as they're concerned, you can't live without making those payments that'll really effect you. So the ratios they're looking at, typically they want to see that ratio 50% or less. Sometimes they'll go as high as 55%, but generally they'll want to see you being 50% or less, obligated to pay out what's your gross taking in. Does that make sense? And that's called income. I said with income, D.T.I. is the important thing there.""