8 Fun Facts about Mortgages (that you wish you had known yesterday)

Have you ever watched an episode of House Hunters & thought to yourself "I wish I could buy a place of my own.  I bet I could afford a decent place here!"?

Going through the process of buying a house/condo/townhouse/etc. can be a very confusing process, especially if it is your first time!  How do I know this?  I happen to be in the process of being a first-time home-buyer with my fiance.  So I thought I'd write down some of the things we learned... after we met with the banker...

Maybe this is obvious, but I didn't necessarily know all of it until after we met with a banker... and they basically laughed us out of the bank & said "Good Luck!"  So here are 8 things about mortgages you wish you had known:

1) You should get pre-approved for a mortgage.

Before you really start your search for a new home, you need to know your budget.  Start by looking at home prices in your ideal neighborhood, but also consider other areas nearby that might be cheaper, just so you don't get your heart broken.  That will give the bank an idea of what you really want so that they can (at least pretend) to try to find a place for you.

1a) Documents you will want to bring to your pre-approval meeting (not that you will necessarily show them to anyone):
-At least 2 years worth of W-2's & Tax Returns
-At least 2 months worth of Pay Stubs
-Your last bank statement(s)
-401(K) statement(s)
-Other statement(s) of income
-Current rental agreement(s) (if applicable)
-Your SSN
-Other documents may be necessary (check with your bank!)

2) Your down payment should be at least 20% of the home purchase price you are looking at.

Anything less than 20% will result in a higher interest rate, and will likely require you to have to pay for "mortgage insurance," making your total monthly payments much higher than they really need to be.  So for instance, if you are looking at buying a $250,000 condo in San Diego, your down payment should be about $50,000!

3) The bank wants to see lots of credit history AND a good credit score.

Not only do you need a good credit score (which makes sense, right?), but you also need at least 3 current lines of credit that have been open for at least 12 months (obviously all with good payments/usage/etc.).  Without at least 3 lines of credit for at least 12 months, they might laugh you out of the bank (that almost happened to us...), even if your credit score is good.

4) Banks are only allowed to force you to pay up to 47% of your income towards your debt.

And that income should be documented in 2 years worth of W-2s or Federal Tax Returns (think Form 1040 that you fill out between Jan 1-Apr 15 every year).  Your debt includes anything and everything that you might have, not just the mortgage payment-- that includes student loan debt, other loans, or credit card debt.

The 47% includes debt + mortgage payment + interest + [property] taxes + mortgage insurance (see #3) + homeowner's insurance + HOAs (if applicable) + any other minor payments that are included in your housing costs.  That means if you make $16/hour, you can afford monthly payments of up to (approx.) $1300.
[The Math: hourly wage * 40 hours/week * 52 weeks/year, divided by 12 months, * 47%]

5) Your pre-approval is good for 90 days.

That means that for the 90 days after you get pre-approved, you can pretty much assume that your mortgage rate and payment (and your purchase price) will basically be the same as your pre-approval.  After 90 days the changes in interest rate will most likely have changed, so the bank doesn't want you to think you can afford something they no longer are willing to lend you.  That brings me to #6:

6) Your pre-approval does not guarantee that particular mortgage or rate.

Rates change daily and can affect the amount the bank is willing to lend you.  For the past several months (summer of 2013), the interest rate has increased over one full percentage price, which has discouraged home buyers.  If the interest rate is high, your loan will be lower, because monthly payments cannot exceed 47% of your income (see #4... also the economic collapse of 2008).

7) There are 3 basic types of mortgages: 30-year fixed, FHA, and VA.

30-year fixed is the most common.  If you have at least 3 lines of credit open for over a year, a good credit score, and at least 20% for a down payment, you will most likely go with this one.  You have equal payments for 360 months.  Yay.

FHA (Federal Housing Administration) loans are for people who don't quite meet the minimum qualifications for a mortgage.  You can get this if you don't have enough credit history (or less than 3 lines of credit for a year) but still have a good credit score.  The FHA loan already has mortgage insurance built into it, so more of your payments will go toward the insurance than under the 30-year fixed (meaning the payments going toward your house will be smaller, also meaning you will be approved for a smaller loan).

VA loans are for veterans.  I can't give you much information about those, but if you're a veteran, definitely look into these. :)

There are also other variants of the 30-year fixed, such as 30-year variable, interest-only, or 5-1 or hybrid ARM (adjustable rate mortgage).  Again, I can't give you much information about those, but if your financial situation is special/might change in the near future, you can look into those.

8) More costs that might be hiding that you should consider (aka Closing Costs)!

Loan origination fees, Title Insurance, Appraisal Fees.  Sound familiar?  Probably not (unless you've done your fair share of research already).  These are all costs to take into account for the "closing" process-- after you decide you want to buy the house but before you get the key-- this is a process which can take weeks or even a few months.

These costs are estimated to be about 3-5% of the total loan cost.  For example, a $250,000 loan could have closing costs of approximately $12,500.  Those are upfront costs, which will typically come from what you originally thought would be your down payment.  Sometimes you can ask the seller of the home you are purchasing to help cover those costs, but don't count on that happening, just in case.

And a bonus fun fact!
9) Make sure you budget for miscellaneous expenses, such as moving costs, maintenance costs, HOA fees, and an emergency fund (for Just In Case).


Disclaimer:  This is advice from my own personal experiences.  I am not a financial expert, nor do I really necessarily know what I am talking about.  Check with your local bank for true, expert advice.  I only share my experience to prepare you for what could be ahead.