08 - Intro to Mortgages

The path to homeownership can feel overwhelming, but it doesn't have to be. In this episode, we break down the crucial first steps of the mortgage process. This episode is a jargon-free introduction to buying a home with confidence, explaining the critical difference between a pre-qualification and a pre-approval, how to understand your total monthly payment (or "DTI"), and the truth about the 20% down payment myth and other options available to first-time homebuyers.

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Transcript

Episode 8 | Intro to Mortgages

00:00:00 Daniel Hill: Shanna. Let's picture a young couple excited to buy their first home. They download all the real estate apps. They spend their weekends driving around to open houses, and finally they find the one.

00:00:15 Shanna Browning: Oh yeah. Daniel, that perfect kitchen, the fenced in yard for the dog. They already see themselves living there. Their dream!

00:00:23 Daniel Hill: Exactly. They call a lender ready to make an offer. But after running the numbers, they find out they can only afford about two thirds of the asking price. They're absolutely crushed. They did the whole process completely backward and wasted so much time and emotional energy.

00:00:43 Shanna Browning: Yeah, and it's such a common and heartbreaking mistake. And that's why we're going to talk about the first right steps today.

00:01:00 Daniel Hill: Welcome back to Making Sense of your Cents. I'm Daniel Hill.

00:01:04 Shanna Browning: And I'm Shanna Browning. And for many people, buying that home is the biggest financial decision of their lives. It's the American dream. And because of that, the process can feel really overwhelming and very intimidating.

00:01:18 Daniel Hill: Our goal today is simply to demystify the very beginning of that journey.

00:01:25 Shanna Browning: And so let's start with the mistake that Daniel just talked about. What is the absolutely non-negotiable first step someone should take if they're just thinking about buying a home.

00:01:35 Daniel Hill: And before you even look at a single house online, before you ever call a real estate agent, you need to talk to a lender to get what we call a conditional qualification letter. This is the foundation of your home search. Now we often hear the terms pre-qualification or pre-approval. Let's clarify how First Century Bank handles this.

00:02:00 Shanna Browning: So it's a really important distinction, right? So here at First Century we issue what's called a conditional qualification. We don't issue blanket pre-approvals because every loan is unique. So when you come to us we're going to look at the financial information you provide; your income, your debt, your assets. And based on that snapshot, we're going to provide a letter stating that you appear qualified for a loan of a certain amount conditional on us verifying that information and the property meeting our standards.

00:02:35 Daniel Hill: So why is that letter so important to have in your hand before you shop?

00:02:39 Shanna Browning: Well, there's two reasons to that. First, it gives you a realistic budget. It prevents you from falling in love with that house that just really doesn't fit your financial reality.

00:02:50 Daniel Hill: It stops that heartbreak.

00:02:51 Shanna Browning: It does, it does. And so, second, in the market, sellers want to know you are serious, right? You want to look for a house, but you're just looking. Well, the sellers are ready to sell. So a conditional qualification letter shows them that you've already spoken to a lender, a local lender, and that we've done an initial review of your ability to pay. So it really gives you the consumer your credibility.

00:03:17 Daniel Hill: And it sounds like it protects not only the buyer, but it also protects the bank. It sets the guardrails so you as the as as the consumer don't get in over your head.

00:03:27 Shanna Browning: That's right. It's not from a guessing game, which is where you've started. Now you have a plan.

00:03:34 Daniel Hill: So once you have that letter and a budget, people naturally start thinking about the monthly payment. We often hear the acronym P I T I. Can you break that down and explain why that acronym is so important?

00:03:47 Shanna Browning: Absolutely. So PITI.. Again it's an acronym but it's your true total housing payment and understanding that is essential to avoid a really, really big, major shock at some point. So what PITI stands for is Principal, Interest, Taxes, and Insurance. And so what we're going to do is we're going to take those one by one. And principal and interest are the two parts of that that go to the bank.

00:04:19 Daniel Hill: Yeah. Principal is the portion of your payment that actually pays down the amount of the loan you borrowed. In the early years of a loan. That may be a more surprisingly small part of your payment interest is the cost of borrowing the money from the bank. So this interest is the cost of having that loan.

00:04:42 Shanna Browning: Correct.

00:04:43 Daniel Hill: So P and I, they're not the only parts of the story. What what about T and I Shanna.

00:04:50 Shanna Browning: So that T and I are crucial and are often underestimated by first time buyers. So the T stands for your taxes, your taxes, your property taxes that you owe to your local government. So pi t principal interest taxes. Now we're going to hit the the last one for I which stands for not interest. Not on this one. It stands for your insurance. So your homeowner's insurance premium that protects your home from damage. So you have to have insurance. As a homeowner your bank is going to require that. We're going to require that. So your your lender is typically going to collect one twelfth of your estimated annual property tax bill and your annual homeowner's insurance premium, along with your mortgage payment each month.

00:05:43 Daniel Hill: And they'll they'll hold that money for you.

00:05:48 Shanna Browning: Correct. So that money is put in a separate account called an escrow account. So then when those big bills come due once or twice a year, the lender the bank will pay them for you out of that account. That's a service to you to ensure that the taxes and insurance are always paid, so you don't have to worry about it. But it means your actual monthly payment to the bank can be hundreds of dollars more than just principal and interest, which is sometimes shown on basic online calculators. So you've got to budget for that PITI payment.

00:06:29 Daniel Hill: So now let's talk a little bit about the types of loans that are available. There's a lot of information online about government backed loans and secondary market products. How how does First Century Bank approach these type of products.

00:06:47 Shanna Browning: So talking about it from our perspective, we're a little different. And I think that's really kind of a huge advantage for our clients and our customers. So at First Century Bank, we are an in-house lender, which is also known as a portfolio lender. So basically that means we do not generally offer secondary market products like an FHA or VA loans that are sold off to investors. Instead, when we make a loan, it stays right with us.

00:07:18 Daniel Hill: That's great. And what does that mean for our clients and customers?

00:07:22 Shanna Browning: Well, it's local. It's local decision making. It's local conversations. We aren't just plugging numbers into an algorithm in New York or some big city that spits out yes or no. We're going to look at your whole picture. What's your story? What are you looking for? How can we help? We use common sense underwriting. We know our community and we know our customers. And if you have a unique situation that might not fit that rigid, really closed box of a secondary market loan. We've got the flexibility to look at it differently, because it's our money that we're lending to you.

00:08:00 Daniel Hill: And that really is a huge benefit. Does that impact how you would handle a down payment? You know, we often hear myths about needing twenty percent down.

00:08:11 Shanna Browning: Yeah. So it does impact it. So while putting twenty percent down is kind of the gold standard or the practice because it gives you immediate equity and it lowers your payment because you're bringing twenty percent to us for that loan. We know that's not always possible for everyone. And again what's the dream? The American dream is to own a home. But because we're an in-house lender, we don't offer those specific three percent down government products you might see advertised nationally. However, we will work closely with you to find a down payment structure that works for you, but also protecting us and making sure your loan is safe and sound.

00:08:53 Daniel Hill: So the key takeaway here is don't assume you can't buy just because you don't fit a generic mold you saw online. Come and talk to a local lender.

00:09:03 Shanna Browning: Oh, absolutely. I mean, conversations are important. Knowing your lender, knowing your bank are important because products are different. Not everybody fits into that little box. We focus on the relationship piece. We want to sit down with you, look at your specific financial picture structure, an in-house loan that makes sense for you. We want you to walk away when you thoroughly and through exactly what down payment would be required for the specific home you're looking at.

00:09:34 Daniel Hill: It really gives that personal touch, and that's what community banking is all about. You're not a number. You're our neighbor.

00:09:42 Shanna Browning: My goodness. What do we always say when we are in the communities that we work in and play in? We're investing in that community by investing in you.

00:09:53 Daniel Hill: Exactly. Investing in our communities. That's right. And that makes us who we are.

00:09:58 Shanna Browning: Yeah, exactly.

00:10:00 Daniel Hill: Wow, Shanna, this has been an incredibly valuable conversation. And that brings us to this week's actionable tip.

00:10:11 Shanna Browning: So action item for this week. We know it's a lot of information, but what we want you to do is to calculate your starter DTI.

00:10:20 Daniel Hill: There's another acronym.

00:10:21 Shanna Browning: Oh those acronyms. So DTI stands for debt to income. And it's a ratio. It's one of the most important numbers that we as a lender are going to look at. And it can calculate a basic version of it right now.

00:10:37 Daniel Hill: Here's how. First you're going to add up all of your monthly debt payments. This includes your car payment, your student loan payment. The minimum payments on any credit cards. Don't include your rent or your utility bills. This is just debts.

00:10:53 Shanna Browning: That's right. And then you're going to take your gross monthly income. Gross monthly income is the income before any taxes or deductions are taken out. So if you're salaried, just divide your annual salary by twelve.

00:11:08 Daniel Hill: Now you're going to take your monthly debt payments. Divide that number by your gross monthly income. The result of your DTI ratio. That would be that. For example, if you have one thousand dollars in debt payments and a five thousand dollar gross monthly income, your DTI is twenty percent.

00:11:29 Shanna Browning: And that's really good because lenders want to see a DTI of forty three percent or lower, including your potential new mortgage payment. So knowing your current DTI gives you a really, really, really powerful snapshot of your financial health, and it shows you how much room you have in your budget to take on a mortgage. I hope this helps us explain to you all what you're looking for, to feel more prepared and confident as you're going into house hunting. So what we're going to do next week is dive into the world of digital banking and how to keep your information safe and secure online, like real estate applications.

00:12:15 Daniel Hill: Absolutely. Don't forget subscribe to Making Sense of your Cents wherever you listen and send us your questions at podcast@fcbtn. com.