Test Your Knowledge About How Mortgages Work!

How mortgages work

Probably everyone knows something about how mortgages work. But, if you’re going to buy a home, you need to know more than “something.” It doesn’t’ matter if you’re a seasoned or first-time home buyer, the more you know about the terminology and the way mortgages function, the better off you’ll be. Test your knowledge here. You’ll probably learn something new.

What should you do before you start looking at houses for sale?

Get pre-approved for a mortgage loan. Your real estate agent can guide you to a proven lender depending on your financial situation. For example, if you’re just graduating from school and starting your career as a doctor, there are specialized mortgages for you. If your credit score isn’t the greatest, you’ll want to work with a lender who can provide you with the widest possible alternatives.

When you know how mortgages work, you’ll be glad you’re preapproved. Once you’re pre-approved, you’ll know exactly what prices of homes you should consider. In addition, a pre-approval gives you an advantage when you find a house you want to buy and negotiations start. One thing sellers try to avoid at all costs is accepting an offer and then having the deal fall through because the buyer couldn’t get financing.

Besides that, with a pre-approval, the seller knows that you’re a serious buyer, and that the odds of you not being able to get financing is very low.

Does a pre-approval guarantee you a loan?

No. The pre-approval is done at a specific point in time. If you do something that changes your financial situation before you close, you may not get the mortgage you wanted. For example, if you increase your debt by purchasing major items for your new home before you close, your financial situation changes. You will probably get a loan, but the terms may change and that will increase the monthly payment you had planned on.

Other issues may come up with the home you want to purchase. Most lenders have guidelines for the type of home they will finance, so be sure you follow those guidelines when looking at homes.

Is a Mortgage a Secured Loan?

Yes. A secured loan is simply a loan that uses some type of collateral to reduce the risk for the lender. Car loans are secured by the car, and mortgages are secured by the home. If a borrower defaults on a secured loan, the lender has the right to seize the collateral. For a car, the lender repossesses the car. For a home, the lender starts foreclosure proceedings.

Is it Necessary to Put 20% Down on a Home?

No. You need to know how mortgages work because there is a lot of misinformation floating around. There is a myth that all home buyers must put 20% down on a mortgage loan. It probably came about because you’ll get better terms if you put at least 20% down. Some lenders may require a 20% down payment, but there are others that don’t. Make sure you evaluate alternatives before deciding on your down payment on a house.

What is a Conventional Loan?

The government doesn’t back conventional loans.  The lender takes on all the risk, so conventional loans often require larger down payments and better credit scores.

What is a Government-Backed Loan?

It’s a mortgage loan backed by one of several governmental agencies. Examples include FHA, VA, and USDA. FHA loans offer lower down payment requirements, but you will need an insurance policy to protect FHA if you put down less than 20%. The cost for that insurance is added to your monthly mortgage payment. Most government-backed loans require that you keep the mortgage insurance in effect for the life of the loan. The only way to remove it is to refinance your loan.

What is PMI?

It stands for Private Mortgage Insurance (PMI). It’s a policy that a conventional mortgage lender may require if your down payment is less than 20%. It is similar to the insurance the FHA requires, but since no government agency is involved, lenders add the word “private” to the name. PMI is usually removed if the borrower has a good payment history when the mortgage reaches 78 or 80% of the value of the home.

For example, let’s say you purchased a $300,000 house and put 10% down. At that point, your loan amount of $290,000 is 90% of the value of the house. After making payments over time, you’ll reduce the amount you owe. When it reaches $240,000, your loan will be at 80% of the value of the home, and you can ask your lender to remove the PMI.

how mortgages workCan My Lender Sell My Mortgage?

Yes. To a lender, your mortgage loan is just another investment. They’re planning on making money from the interest you pay on your loan. But your lender can decide to sell your loan if they want more immediate cash. Often, banks will sell loans to get the capital they need to make new loans.

Another thing that can happen is that your lender chooses to have someone else service the loan. If that’s the case, the people you talk to about your loan and the place you send your loan payments to will change. It may seem as if your lender sold the loan, but they may have just hired someone else to process payments and do the other administrative work surrounding a mortgage loan.

Lenders sell mortgages and change servicers on a regular basis, so don’t be surprised if you got the loan from one lender and then work with other lenders or servicers during the life of the loan.

So, How Did You Do?

Keeping up with how mortgages work will help you make your home buying experience a good one. If you’re a first-time homebuyer, don’t miss our post on First-Time Homebuyer’s Mortgage Tips.

Do you have other questions about mortgages? If so, just leave questions in the comments section below and we’ll be glad to answer them for you.

If you want to hire Realtors in Broward County, please consider the Teri Arbogast Real Estate Team. Take a look at our Google reviews, and you’ll see that our clients have lots of good things to say. We’re very proud of our five-star ratings on Google, Zillow, and other real estate review websites. We’d love to make you our next successful client!  Call us at 954-242-8030 or send an email today.