Real Estate 101 – Understanding Your Mortgage Scheme
Whether the term says adjustable or floating rate, 15-year or 30, the question these days for home buyers is, How much mortgage can you afford?
These are just a few of the many questions home buyers will ask themselves. Before a potential home buyer even begins to consider getting a housing loan, here are a few things they need to consider. First, take a closer look at your household budget to determine how much you can spend on a mortgage each month.
Second, request for free copies of your credit report, and it’s easy to get this since, you’re entitled to receive a free report annually from each of the nation’s main credit reporting agencies. Lastly, familiarize yourself with all of the terms and variables that are generally associated with financing a home, such as interest rate policies, terms, points, fees, etc.
Buying A Home Is The Biggest Investment You’ll Ever Make
Buying a home is the biggest financial investment most of us will ever make. As with any large project or goal, it requires dealing with a variety of complex issues. The best approach is to divide the process into manageable tasks. The following deals with the first steps of gathering your records, determining what you can afford, and understanding the different mortgage options.
Talk To A Varied Array Of Lenders
You can basically talk to practically any lender and apply for a loan. These lending agencies or firms do all the processing and verifications and finally, you own the house and now you have a home loan and you make mortgage payments.
You might be making payments to the company who originated your loan, or your loan might have been transferred to another institution. The agency you make your payments to very rarely owns your loan. They are the “servicer” of your mortgage. They are called the servicer because they are simply “servicing” your loan for the institution that does own it.
You see, what happens behind the scenes is that your loan got packaged into a “pool” with a lot of other loans and sold off to one of the three institutions listed above. The servicer of your loan gets a monthly fee from the investor for processing payments and taking care of your loan. This fee is usually only 3/8ths of a percent or so, but the amount adds up. There are agencies that service over billions of dollars of home loans. Three-eighths of a percent on a billion dollars is a tidy income.
How Much Mortgage Can You Really Afford?
The Federal National Mortgage Association,or better known as Fannie Mae, is a government-sponsored organization that purchases mortgages from lenders and sells them to investors.
Two income-to-debt ratios established by Fannie Mae are standard requirements for conventional mortgages. The first requirement is that monthly mortgage principal and interest payments (P&I), plus insurance and property taxes, must not, or cannot exceed 28% of the buyer’s gross monthly income (some exceptions may apply to increase this limit to 33%).
The second requirement limits total monthly debt payments (housing, credit cards, car payments, etc.) to 36% of gross monthly income. In addition to these requirements, you may have to pay 10% to 20% down on the total purchase price to qualify for a conventional mortgage.
Mortgage Servicing Is Where Lenders Make Profits
As a matter of fact, mortgage servicing is where lenders make the real money. The entire system of originating mortgages, including wholesale lenders, mortgage brokers and mortgage bankers is designed so that servicers get loans into their portfolio — hopefully at a “break even” level — but often at a loss. Mortgage servicing is where they make their profit.
Once a home buyer’s loan has been packaged into a pool and sold to Fannie Mae, Freddie Mac, or Ginnie Mae, the lender gets additional funds so they can make more loans (to service in their portfolio) and sell to those institutions, so they can get more money, and so on.. This mortgage cycle allows credit institutions to lend you money.
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