Understanding the Basics of Mortgages

Ever feel like you’re paying too much on your mortgage without even realizing it? Or unsure what a mortgage even is? Or how to get one? Over the past six years of lending, I’ve watched mortgage rates fluctuate wildly, and I’ve noticed that many people focus solely on the interest rate when starting their mortgage journey. However, there are other important factors to consider that can have a long-term impact. In 2020 and 2021, people were unsure whether to act because rates might drop further and home prices were rising. In 2023 and 2024, the questions were about rates dropping or changes in the presidential office. There are also outside factors at large when it comes to the housing market. What goes up must come down, and what goes down must come up.

Here’s the truth, and it’s how I approach my work as a Mortgage Loan Officer: You need to be honest with yourself and the facts, and then build trust in the process and plan you have. Let’s start with the basics. A mortgage is a loan used to purchase or maintain a home, land, or other types of real estate, secured by the property itself. Mortgages rely on three key elements, much like a three-legged stool: Income, Assets, and Credit.

Income: This shows your ability to repay the loan. You might need to provide your two most recent pay stubs if you’re a W2 employee, or your two most recent tax returns if you’re self-employed, along with other documents to prove your income.

Assets: These demonstrate that you have the funds for a down payment, earnest money, closing costs, and possibly reserves. Did you know that seasoned assets are funds that have been in an account for 60 days or more? That is why we ask for 2 months of bank statements. We want to see what liquid assets you have to support your part of the loan.

Credit: While it might seem like a game, your credit score reflects your financial reliability. A strong credit score can open doors to better rates. Rates are adjusted with two factors — credit score and your loan-to-value, or how much you are putting down for a down payment. So credit matters when obtaining a mortgage loan.

As a mortgage loan officer, I start with these simple truths for everyone I meet. I ask a series of fact-finding questions to understand the property or mortgage they desire, and then support that vision with income, assets, and credit. I call this a Mortgage Financial Review, which breaks down what’s happening in someone’s financial life. Whether you’re buying, selling, refinancing, or investing, these elements are crucial to understanding the holistic picture of your financial plan.

Building trust through the truth is essential.

Trust is established when you have a financial relationship with a mortgage loan officer or lender, and your real estate agent, because we become mentors in helping you make one of the largest decisions of your life. Buying a house is up there with getting married and having a child as one of life’s most stressful choices.

I’ve been involved in stressful choices my entire adult life. Before becoming a mortgage lender, my wife and I were wedding photographers, capturing over 30 weddings a year. The stress of the special day boiled down to a moment in time, and I loved it. I had a system and process to make it a smooth experience for everyone involved.

The same goes for mortgages. There’s an order of operations, and in our next newsletter, I’ll teach you the process of obtaining a mortgage loan and what to expect when you apply, purchase, and refinance. I hope to make this second language of mine easier to understand for you.