Beginner’s Guide to How Mortgages Work

by Evan

If you are thinking about buying real estate, you are likely also thinking about a mortgage. However, if this is your first time buying, you may be a little lost about what mortgages are and how they work. From conventional loans to private money loans for real estate, understanding the types and options for mortgages can help you may a better choice.

What Is a Mortgage?

A mortgage is a type of loan for real estate. It typically refers to one with a long term (they can be up to 30 years, although some are shorter). The loan is secured against the property until it has been paid in full. In other words, if you default on the mortgage, the lender can foreclose on your property to recoup the lost revenue.

How Much Can You Borrow?

Figuring out how much you can borrow depends on a few factors: the type of loan, the loan-to-value ratio, your income and your down payment. Conventional mortgages typically require a 20% down payment. Additionally, the mortgage payments and other fees (HOA fees, taxes, etc.) should not exceed 25% of your income, according to may lenders’ guidelines.

Therefore, you can calculate how much you can borrow based on your savings and income. You may be able to pay a lower down payment through a government program or by paying private mortgage insurance. In some cases, you can skip the down payment entirely.

Additionally, many experts advise avoiding your overall loan payments (including auto, long-term credit card, etc.) exceeding 36% of your income. Both ratios are based on gross income, your income before taxes and expenses.

Depending on the type of loan, you will have a loan-to-value ratio that is the maximum you can borrow. Although all lenders typically express this is a percentage, they may base the percentage on different values (purchase price vs. market value, for example). Make sure you understand what the LTV means in a practical sense.

What Are the Types of Lenders?

Many people borrow their mortgages through banks. These highly regulated “conventional” mortgages have some advantages. However, understanding the alternatives can help you find the right option for you.

Conventional mortgages are offered by banks, typically. They are more heavily regulated in terms of the amount that can be borrowed and the qualification requirements.

Hard money lenders can often offer more money and reduce their qualification requirements. In some cases, taking out a hard money loan can be very valuable. For example, if you wanted to fix and flip and home, you would likely be able to borrow more money from a hard money lender. This would help you to pay for the renovations.

Learn More Today

Explore more about your mortgage options today. Buying real estate can be a great way to increase your wealth. However, it is important to understand the options available to you. Perhaps you want to work with a conventional bank or with real estate bridge lenders. Knowing your options puts more power in your hands when you are ready to borrow. Discover more today.

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