Home Loans 101

Knowing everything there is to know about mortgages would take a lifetime and it seems that mortgage programs and mortgage companies are changing the inner-workings of mortgage lending every day. This section of AskOzzie.com was created to help give a basic knowledge of mortgages.

Home Loans or Mortgages were created to help people purchase homes, using the home to be purchased as collateral. Lenders determine whether an applicant is qualifiable for a mortgage loan based on two main criteria. Those two criteria are Debt-to-Income Ratio and Credit Worthiness.

Debt-to-Income is determined by the amount of debt a person is required to pay each month in comparison to the amount of income that he/she earns per month. A person's DTI(Debt-to-Income) is the determining factor in how much money the lender will finance the applicant. Income is detemined by taking the applicant's proveable gross income(usually proven by recent paycheck stubs and W-2's). Debt is calculated by adding up all obligational monthly debt that appears on the applicant's credit report. Then, the debt figure is divided by the income figure to arrive at the DTI. Example: Applicant's Gross Income is $4,000 per month. Applicant's Monthly Obligational debt: $1,750(projected monthly mortgage payment: $1,300, car payment: $300, credit card payments: $150). $1,750(Debt) divided by $4,000(Income) = 43.75%(DTI Ratio). Most loan programs will only qualify an applicant to buy up to 50% DTI Ratio.

Credit Worthiness is determined by credit scores determined by the three major credit bureaus, Experian, Equifax, and Transunion. The mortgage lender will pull all three credit scores and use only the middle score, otherwise known as the mid-score. The lender then uses the mid-score to determine if the buyer is able to recieve financing. Based on the credit score the lender will also determine the applicant's down payment amount.

There are many mortgage companies and each company has different programs. The most common loans are Conventional loans, FHA loans, and VA loans.

Conventional loans are loans that are not insured or guaranteed by a third party. Typical conventional loans require a minimum of 5% down, but could require up to 20% down. Typically conventional loans will only allow the seller to contribute 3% towards buyer's closing costs.

FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. FHA loans are now requiring 3.5% as a dwon payment by the borrower. Typically FHA loans will only allow the seller to contribute 6% towards buyer's closing costs.

A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs. This was designed to offer long-term financing to American veterans or their surviving spouses (provided they do not remarry). The VA loan is one of the few remaining loan that does not require a down payment. Typically VA loans will only allow the seller to contribute 3% towards buyer's closing costs.

The first step in finding out which mortgage loan is best for you is filling out a loan application with a professional mortgage broker/banker.

 Click here to begin the loan application process.