How Does a Mortgage Work?

How Does a Mortgage Work?
"Mr. Culbertson, I was thinking about refinancing my house again, but I don't really know what to do. Because I have friends who have done it in the past, and a lot of people have taken advantage of them. So, please, can you give me some advice? How can I start?" "Yeah, I'd be happy to. What I'm going to get into for you are the very basics of how a mortgage works. What the banks look at. I compare it a lot to getting your car worked on at an auto mechanic. If you go to an auto mechanic and you don't know the basics of a car, it's very easy for them to take advantage of you. Not everybody does, but unfortunately it happens quite a bit. If you know the basics of how a car runs, then it's a lot more difficult for that to happen. This same thing happens in the financial industry. Alright, if I give you the basics of how the mortgage runs, or how home financing works, it'll be very difficult for people to take advantage of you. So, the first thing I'll get into, the first segment, is how a bank evaluates you as a client. Because it's very important. The first thing they're going to look at. When a bank's breaking down your eligibility to get a mortgage, the very first thing they're going to look at, or one of the first main items they're going to look at, is your income. And with your income, they're looking at something, an acronym for it is called D.T.I., which stands for debt-to-income, which is a ratio they analyze, and that's how much you have coming in gross, it's before taxes, versus how much you're required to pay out. And required to pay out, they're only looking at things on your credit report that you're supposed to pay every month. They're looking at your credit card debt, minimum payments, they're looking at your auto loans, they're looking at your mortgages. Those are the three main, or any secure loans that you have. And they're doing that because you can live without water, you can live, not really without water, but with your water getting shut off, you can still live. You can still live with your electricity shut off. But, as far as they're concerned, you can't live without making those payments that'll really effect you. So the ratios they're looking at, typically they want to see that ratio 50% or less. Sometimes they'll go as high as 55%, but generally they'll want to see you being 50% or less, obligated to pay out what's your gross taking in. Does that make sense? And that's called income. I said with income, D.T.I. is the important thing there."