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A Basic Guide to Mortgage Loans

Q:  What is a Mortgage Loan?
A:  A loan for the purchase or refinance of real property, secured by a lien on the property.
Mortgage Loan Uses
There are two main uses of a mortgage loan:  to purchase a home or refinance a home. 
A purchase is straightforward; you borrow the amount of money requested at application, and then pay it back over time.  The mortgage loan can be used to purchase the following:
  1. A primary residence (a home you are going to live in).
  2. A second home (a home that you will live in part of the year away from your primary residence)
  3. An investment property
Refinancing is for borrowers that already own a home who want to change or improve their current mortgage loan.  A person can refinance for the following purposes:
  1. To get a lower interest rate and/or shorten the term (term: the time it takes to pay off the mortgage loan).
  2. To take cash out of their home for home improvements
  3. To take cash out their home to payoff and consolidate other debts.
How Mortgage Loans Work
Once you’ve decided to apply for a mortgage loan it is important to speak with a mortgage professional at First Bank & Trust.  Your mortgage professional will give you detailed information regarding programs that are right for you and estimate payments and closing costs associated with the type of mortgage you are requesting.  Your mortgage professional will explain the down payment requirements or equity requirements for refinances.  They will review interest rates and terms, discuss your financial goals for your property and look at every detail necessary to ensure the loan you request meets your needs.
Now let’s look at some of the details.  
Down Payments and Mortgage Insurance:
Some mortgage loans can cover up to 100% of the purchase price such as Veterans Administration (VA) loans, First Bank & Trust’s Home 100 and USDA/Rural Development loans.  Other loans require a down payment starting at just 3% down (example: $100,000 purchase price x 3% down=$3000 down payment).  Of course, you can always put down as much as you want toward the purchase of a home.  When refinancing you generally should have a least 10% equity in your home. Equity is the difference between the value of the home and the amount you owe.  An exception to this would be a Veterans Administration (VA) loan, which will allow up to 100% refinance.
In years past the amount of money you could borrow on a home loan was usually limited to 80% of the purchase price of the home.  However, due to the introduction of private mortgage insurance (PMI) and mortgage insurance premiums (MIP), the risk of offering low down payment loans by banks and mortgage lenders was reduced, giving borrowers greater flexibility and more options in purchasing a home.  
How it works:  Mortgage insurance is a cost to you during the repayment of your loan.  It adds an insurance premium to your loan amount or your monthly payment and in the case of a FHA loan; the insurance premium is added to both.  In short, you will pay slightly more over the life of your mortgage loan to get a loan with low or no down payment.  Mortgage insurance usually will be removed when you reach 20% equity through repayment of you mortgage loan.  Additionally, your credit score affects PMI, the higher the credit score, the lower the PMI cost.  On government-insured loans, the MIP is the same regardless of credit score.  Reminder, if you have a 20% down payment, you should not have to pay private mortgage insurance (PMI).
Because of PMI and MIP, you have more flexibility on how much it costs to get into a new home, giving you more home purchase options to reach your financial goals.  
Interest Rates and Length of a Mortgage (Term):
There are fixed rates, which means that the rate will not change during the life of your loan, and there are adjustable rates, which can fluctuate (go up or down) based on market conditions. 
Fixed rates that do not change during the life of your loan offer less risk and provide certainty.  
Adjustable rates usually start lower than fixed rates when you qualify for a conventional or government insured mortgage loan.  However, In-House loans that provide flexibility for unique credit situations or unique property types may have adjustable rates that are higher than fixed rates.  Additionally, a key component to adjustable rates is market conditions can cause the rate to rise or drop; creating some uncertainty with the risk of rate increases that can result in a higher monthly payment.  
Note: Interest rates do vary for each type of loan program. Additionally your credit score affects the interest rate; higher credit scores qualify for better rates than lower credit scores (See our previous blog: Credit Reports…Credit Scores…).
The length of repayment for a mortgage is called a “term”.  The most popular mortgage terms discussed are 30-year and 15-year mortgages, however, you can request a 25, 20 or 10 year loan, which helps you tailor your loan to your particular financial goals.
Qualifying for a Mortgage Loan:
How do you qualify for a mortgage?
Qualifying for a mortgage is an analysis of the following:
  1. Your income which is verified by paystubs, W-2 forms and tax returns
  2. Your work history for the most recent 2 years
  3. Your assets which are verified by bank statements 
  4. Your debts which are verified by a credit report
  5. Your credit score, also verified by a credit report
Qualification starts when you apply for a mortgage. Your mortgage professional will complete a mortgage application asking you for the details that will be found in the above list of documents.  You may know some of this information from memory, if not; having these documents readily available will help the qualification process. 
Once your application is complete, your mortgage professional will ask for the above documents to verify the information provided on the application.  Your mortgage professional will analyze the information based on your request and help you choose a program that meets your needs.  If you do not have a property selected at the time you are qualifying for a mortgage, that’s ok, your mortgage professional can qualify you for a purchase price amount and provide you a qualification letter that you can give to your real estate agent while shopping for a home.  If you have a home selected, then your application and supporting documents will move your file from qualification to mortgage processing, which progresses to fully underwriting your loan request for loan approval.  Below is a list of mortgage loan programs that are available at First Bank & Trust.
Loan Programs Available:
Conventional Loan – down payments as low as 3%, PMI (Private Mortgage Insurance) is required above 80% Loan-to-Value, common names associated with conventional loans: Fannie Mae and Freddie Mac
FHA (Federal Housing Administration) Loan – down payment as low as 3.5%, MIP (Mortgage Insurance Premium) required, government insured loan through HUD
Veterans Administration (VA) Loan – loan designed for veterans by the Veterans Administration, no down payment 100% loan, government insured loan through the Veterans Administration
USDA/Rural Development Loan – no down payment 100% loan, designated eligible lending areas, income limitations apply, guarantee fee applies, government insured loan through USDA
Home 100 Loan First Bank and Trust in-house loan, no down payment 100% loan, PMI (Private Mortgage Insurance) required, locally created and underwritten for our community
In-House LoansFirst Bank and Trust common sense lending, for when creative solutions are required and flexibility is needed for common sense situations
Conclusion:

Buying or refinancing a home is a major financial decision that affects your financial goals for at least a decade or longer and there is a lot of information available to aid you in making good decisions.  Your First Bank & Trust mortgage professionals have many years of experience looking at all types of loan situations.  They use all of their knowledge, experience and resources to be a trusted resource for you when you are ready to purchase or refinance.  Mortgage lending is what we do and First Bank & Trust is here to “Put You First”.

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