Unlocking the Door to Your Dream Home: Insider Insights on Mortgages
By StoryStudio on April 15, 2024
In the Houston area, the average price of a new home is around $400,000. For most people, this is the biggest purchase they will ever make in life. Complicating the matter further, there are numerous laws and regulations revolving around how mortgages are done that can easily turn the entire topic into a foreign concept. Here to break down this extremely complex financial subject is Logan Cates, Assistant Vice President of Mortgage at Texas Bay Credit Union.
Mortgage Basics and Types
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Logan Cates
We all have a general idea of what a mortgage is, but to truly define the term, a mortgage is a loan that someone is going to use to purchase improved real estate or even raw land. The vast majority of home buyers cannot pay cash and therefore have to obtain a mortgage to get that home ownership dream to become a reality. Being a long-term loan, the structure is either a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM).
A fixed-rate mortgage is where the interest rate is fixed over the entire life of the loan. For example, if you have a 30-year FRM, your interest rate is going to be the same from day one all the way through the end of that 360th payment without ever changing.
With adjustable-rate mortgages, the loan will change periodically, ranging from what is called a 3-1 ARM up to a 5-1, 7-1, or 10-1 ARM. Say you have a 3-1 mortgage, then the rate is going to stay fixed for the first three years of the loan and will adjust annually after that based on the market. On the bright side, there are caps in place to prevent the range from jumping through the roof.
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Down Payments and Their Impact
Down payments are typically set by various federal agencies, and the ones that most people are probably familiar with are Fannie Mae or Freddie Mac. People are also probably familiar with FHA and VA loans too. According to Logan Cates, each of those different groups are going to set its own down payment requirements, and lenders have to abide by those – with a notable exception.
“As a credit union, we’re able to do what’s called portfolio lending,” Cates says. “We can make our own down payment requirements for different loan products that we offer.”
How much you put down can also help determine what your payment is going to be, because it directly affects the loan amount and that drives your payment along with the interest rate. Additionally, the amount of the down payment is the deciding factor on whether you are going to need private mortgage insurance or not. If you apply for a Fannie Mae loan and put anything less than 20% down, you’re going to have mortgage insurance on the loan.
Application and Approval Process
For first-time home buyers, the application and approval process can seem daunting to the extent of feeling invasive. “If I’m talking to a borrower, I tell them, ‘Hey, we’re going to look at everything from your blood type to your favorite bubblegum flavor,’” Logan Cates jokes. Kidding aside, there are a few key details he recommends knowing about in advance.
Pre-qualification vs. pre-approval
Pre-qualification and pre-approval are often used interchangeably, but they differ slightly. Pre-qualification involves filling out an application and having your credit report pulled. On the other hand, pre-approval requires providing detailed financial documents such as pay stubs, bank statements, and IDs. The lender verifies this information against your application, resulting in a more reliable assessment of your financial readiness.
ABOUT TEXAS BAY CREDIT UNION
Founded in 1936, by Houstonians, for Houstonians, Texas Bay works tirelessly to provide the best service to their members and works to find each member a tailor-made solution to help them reach their financial dreams. Visit www.texasbaycu.org for more info, including branch locations and hours of operation.
Since mortgage-related terms are abundant out there, here is a little cheat sheet to ensure you don’t feel as intimidated next time you find yourself in a mortgage discussion.
Lingo and Terms
Principal
Interest rate
Amortization
Escrow
Private Mortgage Insurance (PMI)
Annual Percentage Rate (APR)
Closing costs
Loan-to-Value ratio (LTV)
Mortgage points
Refinancing
Debt-to-Income ratio (DTI)
Understanding these terms is crucial for navigating the mortgage process effectively.
Debt-to-Income ratio (DTI)
What determines someone’s affordability of a home is their DTI. A higher DTI indicates less capacity to afford a mortgage. DTI thresholds vary by loan, typically ranging from 45% to 55%, and can be higher for certain loans like VA loans. DTI calculates monthly credit liabilities, including credit cards, student loans, and car loans, along with the desired mortgage, comparing this total to gross monthly income. The resulting percentage reflects the DTI ratio and ultimately determines your affordability.
Interest rate
This rate is determined by the lender, and it’s usually based on what the market’s going interest rate is at the time. This is the way to calculate exactly how much interest you have to pay on that loan monthly and over the life of the entire loan.
Escrow
Escrow is essentially a non-interest-bearing holding account for money to be placed in and then used at a later date. Money that you pay each month will go into a specific escrow account and be used towards your taxes and your insurance. The servicer or the lender is going to hold that money for you, and when the bill is due, they will make that payment on your behalf. Note, there is no interest charged on escrow accounts.
Annual Percentage Rate (APR)
Contrary to what many believe, APR is not the interest rate. APR is actually another way to express some of the costs of the loan compared to the interest rate over the first year of the loan. In other words, APR is just another way to look at the closing costs of the loan in a percentage form, but it is not the interest rate.
Closing costs
Closing costs typically consist of three main components:
Loan-to-Value ratio (LTV)
LTV is the relationship between the loan amount and the appraised value or sales price of a property. This is calculated using the lesser of the sales price or the appraised value. For instance, if the sales price is $100,000 but the appraised value is $95,000, the LTV is based on the lower value of $95,000.
Mortgage points
Also known as discount points, mortgage points are payments made to lower the interest rate on a mortgage. Contrary to common belief, paying one point doesn’t always equate to a one-point reduction in the interest rate. The relationship between points and interest rates is determined by investors in the mortgage market. Buying down to a lower rate may require paying multiple points, as investors may prefer higher interest rates. Points can range from fractions of a point to whole percentages, depending on investor preferences.
Refinancing
There are a couple of different ways you can refinance a mortgage loan. The first is a rate and term refinance where you’re just refinancing to get a better interest rate or to lower your term, meaning you’re going from a 30-year loan to a 25 or a 20 to a 10, which is a no cash-out refinance. Then there’s also a cash-out refinance, which is what most people think of as a home equity loan where you’re getting equity out of your home in the form of cash to use for the expense of your choosing.
Lender charges are fees imposed by the lender for processing the loan.
Various third-party charges, such as the appraisal, credit report, title company fees, and recording charges.
Escrow account setup charges, if applicable, which involve setting aside funds for future payments like property taxes and insurance. These are sometimes referred to as “cushions” rather than direct fees.
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Private Mortgage Insurance (PMI)
A common misconception about private mortgage insurance is that it protects the buyer. In reality, private mortgage insurance is for the lender or the servicer to protect them in case of default. If someone’s making a lower down payment – under 20% – the borrowers will have no choice but to pay PMI.
Amortization
Amortization determines the payment structure of a loan, dividing it over its entire lifespan into monthly payments covering both principal and interest. Initially, more of the payment goes towards interest, with less going towards principal, but over time this flips to the opposite. Fixed-rate loans maintain consistent monthly payments, with the allocation between principal and interest gradually changing until the loan is fully paid off.
Principal
The principal is what you actually owe on the loan – in other words, whatever the sales price is of the home, minus your down payment.
Credit score importance
It cannot be understated how much the role of credit scores play in mortgage approval. In fact, this serves as a starting point in the application process. With Fannie Mae loans, a minimum score of 620 is typically required for approval. Beyond qualification, your credit score influences interest rates, the total PMI, and homeowner’s insurance premiums.
To boost your score, maintaining a strong payment history is crucial, as even one missed payment can significantly impact scores. Additionally, keeping revolving credit balances below 30% of the total limit helps improve credit scores, since exceeding this threshold is considered risky by credit bureaus.
“One thing I hear a lot of members assume is they need to pay off all their debt before getting into a home, and that’s not always the case,” Cates advises. “If your debt-to-income ratio can support a mortgage, then you don’t necessarily need to pay off all of your debt, especially if you have a good credit score mid-600s and up.”
Closing Process
The mortgage process begins with filling out an application and getting pre-approved by a lender. Once pre-approved, you are then able to find a home and negotiate a contract with the help of a trusted realtor. After securing a contract and sending to the lender, they will order an appraisal and prepare the file for processing. This step involves gathering paperwork, ordering title documents, and obtaining insurance information. The completed package is then submitted to an underwriter who reviews it against guidelines. If approved with no conditions, the transaction is cleared to close. At closing, paperwork is finalized with the title company, and the lender provides the funds needed for you to successfully move into your home.
Why Choose Texas Bay for Your Home Mortgage
After proving themselves to be a strong community partner for decades across all of Greater Houston – and holding nine branches throughout the city – Texas Bay is a credit union whose experience covers the entire spectrum of mortgage offerings.
“A lot of people like to go through the big-name lenders, but what they don’t get in going that route is warm, personable experience that’s tailored specifically to them,” says Logan Cates, AVP at Texas Bay. “Our members can walk into any of our branches and reach out to my mortgage team directly Monday through Friday. The loan officers are even available on the weekends. We pride ourselves on putting our members first and doing what’s right for our members from the get-go.”
Choosing Texas Bay for your home mortgage offers several benefits, including the ability to provide portfolio lending. The credit union can make exceptions to fit unique borrowers who don’t meet typical guidelines like those of Fannie Mae. On top of that, Texas Bay has the flexibility to keep loans in-house rather than selling them, ensuring that members make payments directly to Texas Bay for the duration of the loan.
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