The basics

A mortgage is a loan secured by real estate. You borrow money to buy a home and promise to pay it back over a specified period, for a specified cost. Repayment typically happens through monthly mortgage payments. If you
stop repaying the loan, your lender may take ownership of the property.

A mortgage payment consists of principal and interest. If you make less than a 20% down payment, your mortgage payment will include principal, interest, and mortgage insurance. In addition, you will be required to make
payments of your homeowners insurance, and real estate taxes, to your lender on a monthly basis to be placed in an escrow account, in addition to other required expenses that may apply. Your lender will then pay those
third parties from the escrow account funds.

• The principal portion of your payment reduces the
original amount you borrowed.
• The interest portion covers the fee to borrow the
amount you still owe.
• The taxes and homeowners insurance parts are
collected and held in an escrow account to pay your
property tax and homeowners insurance on your
behalf as they come due. If mortgage insurance is
applicable to your loan, that part of your payment is
forwarded to the agency that is providing
the insurance.

Amortize means the process of paying off a debt by regularly scheduled payments that include both principal and interest. In the early stages of your mortgage term, your monthly mortgage payment is mostly interest
and only a small portion pays down your principal. As you continue making payments through the years, and because the principal balance is reduced, a small portion of each payment is interest and a larger portion
of your payment goes toward reducing principal until your entire loan is repaid.

Homeowners insurance provides financial protection in the event of losses that are the result of fire, wind, natural disasters, or other hazards. Most mortgage lenders require you to have a homeowners insurance policy.

Mortgage insurance (MI) protects the lender against financial loss if a customer fails to repay the loan. It is usually required when your down payment is less than 20% of the home’s purchase price, however, there are
some home loan options that do not require MI.
• FHA-insured loans require a mortgage insurance
premium (MIP)
• Conventional loans can be insured with private
mortgage insurance (PMI)
• VA loans require an upfront funding fee,
but no additional mortgage insurance

In addition to the sales price of the home, you’ll need to pay for the services of various real estate and lending related professionals who are required to complete a purchase transaction. Depending on your lender, the
mortgage you chose, and the location of the home, these “closing costs” can add up to several thousands of dollars. You’ll get a better idea of the amount soon after you apply for a mortgage, when you receive a Loan Estimate. The Loan Estimate provides a good faith estimate of closing costs and fees, as well as the loan terms.

The Basics 2

While homeowners don’t have to pay rent, they do have to manage expenses — beyond mortgage payments — that renters never face.

• Maintenance: It can be costly to keep a property in top condition. This is particularly true of older homes, where system and appliance warranties may have expired.
• Taxes: Most communities finance schools and other services through property taxes. Tax rates vary from town to town, so ask your real estate agent about taxes in your area. The good news is that whether you pay them directly, or through the tax portion of your mortgage payment, property taxes are usually fully deductible at income tax time. Consult your tax advisor
for details.
• Association dues: Some communities often have homeowners associations that can charge fees as high as several hundred dollars a month. These fees are
generally not included in your mortgage payment, so you’ll need to budget for them.

Your Seed Mortgage consultant can help you apply for a PriorityBuyer® pre approval that shows an estimated loan amount you may be able to borrow. Add your pre approved loan amount to the amount you
plan to use for your down payment, and you will know your home purchase price range.

Lenders look at your credit score, the cash you have available for a down payment and closing costs, your income, and your existing debt and financial obligations. Two ratio guidelines are used.

• The housing expense-to-income ratio (or front-end ratio) compares your anticipated monthly mortgage payment to your total household gross monthly
income (pre-taxed). A good rule of thumb is to keep your housing costs at or below 28% of your gross monthly income.
• The debt-to-income ratio (or back-end ratio) compares your anticipated monthly mortgage payment and your monthly debt requirements to your gross
(pre-taxed) monthly earnings. Monthly debt includes credit cards, car loans, student loans, consumer loans plus other financial obligations such as child support and alimony. A good rule of thumb is to keep your total
debt level at or below 36% of your gross monthly income.

The three credit reporting agencies — Experian, TransUnion, and Equifax are a clearinghouse for information on the credit rating of individuals and firms.
Credit score is a term often used to refer to credit bureau risk scores. It broadly refers to a number generated by a statistical model which is used to objectively evaluate information that pertains to making a credit decision (i.e.
credit cards, car loans, student loans, etc) that includes:

• Your payment history
• The total amount you owe
• The amount of time you’ve had available credit
• Whether you have any judgments entered against you
• Whether you filed bankruptcy
• The number of times potential lenders have reviewed
your credit
Information in the agencies’ reports is evaluated and interpreted into a “credit score,” which help lenders make loan decisions. Credit scores range from 300 to 850, and yours may determine whether you are approved for a
loan, the terms of the loan, and the interest rate.

The Basics 3

• Pay down revolving debt. Don’t move debt around between credit cards.
• Make bill paying automatic. Set up electronic withdrawals from your checking or savings accounts to help you make timely bill payments.
• Don’t open a lot of new accounts. Instead, hang on to and maintain your older accounts.
• Contact your creditors if you are having trouble.

Most creditors are willing to work out a payment
schedule rather than see you fall delinquent and not
pay at all.

  •  A conventional loan is a conforming mortgage product that meets Federal Home Loan Mortgage Corporation and Federal National Mortgage Association
    (commonly known as Freddie Mac and Fannie Mae) standards and may require a down payment.
  • A government loan is a mortgage product whose requirements are established by a government agency such as the Federal Housing Administration (FHA) or U.S. Department of Veteran’s Affairs (VA). Government loans typically have lower down payment requirements
    than conventional loans. FHA loans have the benefit of a low down payment, though you’ll want to consider all costs involved, including upfront and long-term mortgage insurance and all fees. Be certain to ask your home mortgage consultant to help you compare the
    overall costs of all your home financing options.

• A conforming mortgage has a loan amount and underwriting guidelines that follow standards set by the Federal National Mortgage Association (FNMA)
and Federal Home Loan Mortgage Corporation (FHLMC).
• A nonconforming mortgage has a higher “jumbo” loan amount or underwriting guidelines that differ from standards set by FNMA and FHLMC.