Making Sense of Mortgage Terms

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You will need to make an investment in your new home, called a down payment, in order to obtain a mortgage. A down payment is the amount of money you spend upfront on a home purchase and is collected at the time of closing. This amount will determine the type and amount of mortgage you could qualify for and repay. When the bank combines the required down payment amount and the amount you are borrowing (the mortgage), it should equal the total sales price of the home you plan to purchase.


If you’re making a down payment that is less than 20% of the home price, your lender may require mortgage insurance. Mortgage insurance is an insurance poli- cy protecting the mortgage lender in the event that the borrower fails to make their mortgage payments resulting in default. This type of insurance does not protect the borrower. However, this may assist you in becoming a homeowner as opposed to saving the full 20% down payment.


Generally, when a financial institution reviews a mortgage application, two basic guidelines are used to determine how large a mortgage to grant:

1) Principal, Interest, Taxes and Insurance (PITI) should not exceed 25-28% of gross income and 2) PITI plus other long-term debt should not exceed 33-36% of gross income

Refer to a Mortgage Calculator to determine principal and interest. Long term debt includes car loans, installment loans, alimony, child support, and balances on charge cards that will take more than 10 months to pay off. The size of the down payment you make will determine the mortgage amount that will be granted.