Mortgage Basics for New Borrowers

The dream of owning a home is something that is on just about everyone's lifetime goal list.  It's one of the things that in some ways signals that we have made it in life and can bring great pride and a sense of accomplishment to many.  For many who pursue that dream it can be a confusing undertaking if they are not prepared for the home buying experience.  Without a doubt one of the most confusing and often misunderstood parts of the home buying experience is the mortgage process.  Sadly, most of us do not have the money to just buy a home outright, so we turn to mortgage lenders to help us finance the home of our dreams.

One of the first things anyone who is interested in owning their own home should understand is the role credit plays in the mortgage process.  You are getting ready to ask a lender to make a sizeable loan to you for an extended period of time - often upwards of 30 years.  For them to take on this risk, they need to evaluate your creditworthiness - or your ability to pay the money back.  They typically look at items such as your credit report which lists how you have dealt with other creditors in the past, your total household income and the price of the home you are willing to buy and where it is located.  Based on this information they then decide on whether to extend you the loan and at how much interest. 

Interest is an important concept to understand because over the lifetime of the loan you can expect to pay back double the amount of the loan value based on the interest rate - that $150,000 house has suddenly cost you $300,000.  Your goal in the mortgage process is to get the absolute lowest interest rate you can.

You also need to know how much house you can afford.  Most mortgage lenders typically look for you to spend no more than 30% of your monthly income on house payments.  Of course, the longer the mortgage term and the lower your interest the more house you can afford to buy.  It is important to buy something you can easily and comfortable afford - the last thing you want to do is find yourself in a crisis situation unable to pay your monthly mortgage payment!

Next, be sure you have saved up a sizeable cash reserve before jumping into the home buying process.  You are going to have to pay things such as closing costs (which can be upwards of 5% or more) and pay as much of a down payment as you can to reduce your loan amount as much as possible.  You then will want to have a little reserve left over to furnish your new home and take care of any needed repairs - remember, you own it now and it is up to you to repair it if something breaks!

If you are confused about the mortgage and home buying process, don't feel as if you are alone.  Many people share the same concerns and fears as you do.  Often times in your community there are local first time home buyer groups that meet with experts from the banking and real estate industry there to answer your questions.  Ask your realtor about whether such a group exists and when the next meeting is.   The home buying process doesn't have to be a terrifying experience, and if you come prepared you can win big by getting the best deal possible on your mortgage while getting the house of your dreams.