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A mortgage makes homeownership possible for most people. In the simplest terms, it is a loan that is secured by real property. The lender holds title to the home until the loan is completely repaid. If you fail to pay up, the lender has a right to take the property, sell it, and recover the money that is owed.
The amount of a mortgage will vary greatly depending on the down payment you make to reduce the amount of money that is needed to finance the home. You may put as much money down as you like, or you can sometimes pay as little as 3 to 5% of the purchase price, or sometimes nothing at all. The more you put down, the more you reduce the amount that is financed, thereby lowering your monthly payment.
The monthly payment consists of both principal and interest but also typically includes additional amounts to cover property taxes and insurance-specifically hazard insurance and private mortgage insurance, the latter of which is required for down payments less than 20% of the purchase price.
Home buyers in the U.S. have access to several different types of mortgage loans. Veterans have access to a VA backed mortgage with 100% financing available.
Our team members have information on lender loan requirements and will be able to calculate a rough monthly figure you can afford based on the maximum monthly payment for the loan, taxes, insurance, and any type of maintenance fees. This pre-purchase evaluation by the agent can save you a lot of time spent looking at properties you cannot afford.
Lenders also routinely calculate what you can afford and can pre-qualify you for a loan even before you begin your home search. This way, you know exactly how much you can afford to buy.
Lenders generally stipulate that you spend no more than 28% of your gross monthly income on a mortgage payment or 36% on total debts.
Ultimately, the price you can afford to pay for a home will also depend on other factors besides your gross income and outstanding debts. They include the amount of cash you have available for the down payment, your credit history, current interest rates, closing costs and cash reserves required by the lender, and the type of mortgage you select.
A lot will depend on the length of time you plan to live in the home, other financial obligations, and potential savings gained from comparing the monthly costs of a home against the upfront costs and closing costs involved with a particular loan.
Also, you will need to be comfortable with whatever choice you decide to make. Trust your instincts and do not be pressured into signing for a loan that will not really work for you.
You can get a home loan from several different sources-a credit union, commercial bank, mortgage company, finance company, government agency, thrift (which includes savings banks and savings & loan associations), mortgage broker, and even the seller.
Note, however, that most lenders have tightened their credit standards in light of increasing foreclosures and higher delinquency rates. Begin your search by calling at least half a dozen lenders to inquire about the types of financing available, current rates on each loan type, loan origination fees and number of points, other loan features and their credit requirements for borrowers.
Once you actually apply for a mortgage, the lender will pull a recent copy of your credit report. That inquiry and any and all others are recorded and become a part of your credit file. Normally, several inquiries during a short period are viewed negatively, as a sign you are trying to open several new accounts. Such a move lowers your credit scores; and lower credit scores mean you will be offered a higher mortgage interest rate.
However, there is a caveat. Credit scoring software generally detect that you are shopping for a single mortgage, if you shop within a short, 30-day window. So multiple inquires pulled roughly within this time frame will only count as one inquiry and should not affect your FICO or credit score.
Checking your own score also will not lower your credit score.
Much like a stockbroker helps you buy stocks, a mortgage broker can help you purchase a home loan. Because the broker has access to many lenders, you will be able to select from a wide variety of loan types and terms that fit your specific needs.
Note, however, that brokers are not obligated to find the best deal for you. Of course, if you agree in writing to have one act as your agent, that is an entirely different story. This is why it is important when looking for a broker to contact more than one, just as you would any other lender.
Compare their fees and ask questions, particularly about how they will be paid. Sometimes their fees appear as points paid at closing or the compensation is factored into the interest rate, or both. In any event, haggle with the broker and the lender for the best deal.
Real estate agents normally maintain contact with several brokers. Ask your agent for recommendations.
When you apply for a loan, long, steady employment is always seen as a plus, as is a large down payment, a good credit rating, a history of regular savings, and property located in a 'good' neighborhood.
Not so good in the lender's mind: frequent job changes without salary increases, self-employment in a new venture, bad debt history, no previous borrowing record, and dilapidated property.
Do not be discouraged. These are standard lender pre-dispositions when evaluating your application, but when it comes to making a loan decision, most lenders will tell you nothing is completely carved in stone.
Consider, too, that credit you have qualified for-say, credit cards-can work against you, even if never used. This is because those credit cards are looked upon as being open credit lines-and while they have not been used, they could be used, and potentially used up to the maximum dollar amount allowed by the credit card companies. As a result, their perceived risks lower your credit, or FICO, score
It protects them should you default on the loan, especially if you fail to make payments in the early years of the loan when more is owed on it. Foreclosure, property fix-up, and resale costs could result in a loss on the mortgage loan.
That is a bad situation the lender wants to avoid. So they have historically required cash down payments of 20% of a home's purchase price.
However, if you purchase private mortgage insurance, the down payment requirement can drop to 5% or 10% of the purchase price.
Few lenders will lend the full value of a home unless they have special guarantees, such as that offered by the Veterans Administration (VA) under its mortgage assistance program.
Builders will typically offer no-down payment loans to sell properties in a slow-moving development or a depressed market. Desperate sellers also may commit to finance the down payment for the buyer to move a hard-to-sell home or to make a quick sale. And veterans may buy a home with nothing down through the Veterans Administration's home loan program. And members of some pension funds also may avoid making a down payment.
Builders will typically offer no-down payment loans to sell properties in a slow-moving development or a depressed market. Desperate sellers also may commit to finance the down payment for the buyer to move a hard-to-sell home or to make a quick sale. And veterans may buy a home with nothing down through the Veterans Administration's home loan program. And members of some pension funds also may avoid making a down payment.
Putting down as little as possible lets you take full advantage of the tax benefits of homeownership. Mortgage interest and property taxes are both fully deductible from state and federal income taxes. Also, making a small down payment frees up cash that you can use to meet unexpected home improvements.
Some real estate experts contend it is more economical, however, to make a larger down payment, thus reducing the amount of debt financed over the life of the loan. A borrower could potentially save several thousand dollars, maybe even hundreds of thousands of dollars.
That certainly is an option, although not one most people can afford. Unless you're independently wealthy or have hit the jackpot, it may be difficult to make a 'no-mortgage' investment. And an investment is exactly how you should view it because you get to save on mortgage interest that is usually paid over the life of the home loan-interest that could amount to several thousand dollars, conceivably hundreds of thousands of dollars.
With an all-cash deal, you also save by avoiding loan origination fees, an appraisal, some closing costs and other charges imposed by the lender. You enhance your negotiating position with the seller and get to bypass the rather lengthy loan qualification process, which helps to close the deal quickly. But if you want to use the home as your primary residence, forget about taking advantage of the tax breaks available to homeowners with conventional loans. By paying cash, you basically forfeit those tax breaks.
To determine whether a no-mortgage purchase is right for you, compare it to other investments, weighing the risk, return, and liquidity.
hey are the same as conforming and non-conforming loans. A conventional, or conforming, loan is one not insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA), two federal government agencies that make homeownership possible and generally more affordable for a large segment of the population.
However, that said, many major banks and private lenders now offer non-conventional, or non-conforming, loans for lower-income borrowers and those with blemishes on their credit.