Mortgage 101

Mortgage 101

Mortgage 101:  Understanding the Basics    

Chances are you will have to secure a mortgage in order to purchase Wilmington, North Carolina real estate, unless you have some buried treasure in the backyard or an extremely wealthy relative who is willing to give you the funds.  This can create an issue for two reasons, 1) your income level and credit scores are not high enough to qualify for the mortgage you need, and 2) the number of options for financing and all of their various implications make it impossible to make a decision.

The subject of how to qualify for a mortgage on a Wilmington, North Carolina home is very complex and it is worthwhile to understand the nuances of the process prior to making a decision.  An important first step is to get a free credit report from a reporting agency such as Experian.  It is also a good idea to ensure that all of your payments with your financial obligations are current, and to avoid opening up new lines of credit.

Many buyers have questions about down payments, closing costs and monthly payments, as well as the differences between letters of prequalification and letters of preapproval.  Knowing the details about securing a mortgage is very important if you want to avoid time wasting hassles and costly mistakes, so here are a few handy bullet points about each topic.

·         Down Payments – It is not impossible to purchase a home with 100% financing, though most mortgages require a minimum of a three percent down payment.  The next options typically come in around five and 10 percent.  In many cases it makes good financial sense to put down 20 percent of the purchase price, though it is not a requirement.  Making a 20 percent down payment results provides the borrower with access to better loan terms and the chance to avoid paying mortgage insurance, which can amount to hundreds of dollars in monthly payments.

·         Closing Costs – Basically, closing costs are the fees a borrower has to pay in order to secure a loan.  These costs can range between two and six percent of the sales price, depending on the borrower’s financial situation and the lender they choose.  Simply put, it pays to shop around. Occasionally, a home seller may be willing to pay for some of the closing costs.  Many of the listed closing costs include pre-paid insurance and interest, title insurance, appraisals, home inspections and lender fees. 

·         Monthly Payment – Monthly payments can vary significantly from situation to situation, according to the buyer’s financial strategy, the amount of the down payment, the length of the loan and the interest rate.  Other variables that have an impact on the monthly payment include homeowner’s insurance, taxes and mortgage insurance, if applicable. 

·         Pre-qualified vs. Pre-approved – There is a lot of confusion about the difference between a letter of pre-qualification and a letter of pre-approval.  A pre-qualification is based on trust and a quick discussion about a borrower’s monthly income and debt obligations.  It is only useful for obtaining a ballpark idea about a budget and a borrower’s financing options.  Getting a letter of pre-approval is always a better idea.  This will vastly simplify the process, eliminate guesswork and allow you to shop from an informed position.  Many sellers require a letter of preapproval before they will review an offer. 

Getting a pre-approval should be everyone’s first step in shopping for a home.  Though the process of acquiring a pre-approval requires a detailed analysis of your finances, debt-to-income ratios and credit scores, it is not as burdensome as many people think and can usually be accomplished over a period of just 30 minutes.

If you have questions or would like a referral to a local mortgage broker, give me a call at 858-692-5120 or email frittscausby@gmail.com