Mortgage 101: Definitions and Concepts for Home Buyers

Credit: A good to excellent credit history is expected. This means no collection amounts, charge-offs, or civil judgments. If someone has a bankruptcy on their credit history, he or she needs to re-establish credit before getting a mortgage, and a larger down payment may be necessary.

Closing Costs: Fees charged for services involved with the house sale including processing the load, the title, the deed, and other important paperwork. The amount varies, averaging 2 to 3% of the purchase price of the house.

Cash Down Payment: Minimum 5% cash down payment, plus cash for closing costs is required. Private mortgage insurance is required for mortgages with less than 20% down. Reserves in the form of cash or retirement accounts of at least two and sometimes three months is required. These funds must be saved by the borrower. The source of any large deposits must be documented. Drew Mortgage can help MAFCU members with 3.5% cash down for FHA loans.

Cash Flow: Borrowers need sufficient income to support the proposed mortgage payment of principal, interest, taxes, insurance (or condo fee) and, if less than 20% cash down payment, private mortgage insurance plus other monthly obligations including car loan, credit card payments, personal loans, student loans, alimony, child support, union dues, and any co-signed loans. This calculation is also called a debt-to-income ratio.

Collateral: The property will be appraised to ensure sufficient value.

Equity Position: For refinancing of an existing mortgage, the owner must have equity and owe less than the value of the property as a buffer against potential reduction in property values.

Employment: Must have at least one year at present place of employment, preferably longer. Stable work history is preferred.