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Basics of mortgage for a home buyer

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 12th Apr, 2004 12:01am
You may have the desire of getting a home of your own, but lack of finance may prevent you from fulfilling your dream. This is where proper mortgage understanding can help you a lot. It provides a financing option that can make your dream come true. Proper information on mortgages can help you get the best deal.

Mortgage is a legal process through which a borrower takes a loan for the purchase of residential or commercial property from a lender. The same property is kept as the security for the loan that you have taken out.

Anyways, if you take out a mortgage loan, you have to repay it. Mortgage lenders are concerned with your financial ability to repay the loan. They take into consideration your credit score, your monthly gross income, and the down payment amount, so as to judge your credit worthiness.

In order to repay the loan, you have to make monthly mortgage payments. This amount is determined on the basis of the mortgage rate of interest. The interest rate charged on your loan depends upon your credit score, discount points and down payment. Getting a lower rate is also possible if you can pay a part of the loan amount as prepaid interest or points. You may get a loan at fixed rates, variable or adjustable rates or a combination of both the rates.

The loan application that you have submitted goes through a process of review before the lender gives his or her approval. After the lender approves the mortgage, he/she decides upon the date of closing. The closing involves the signing of legal documents including a mortgage note which obligates you to repay the loan on time.

At closing, the lender requires you to pay the costs of originating and processing the loan. You will also have to deposit property taxes and insurance premiums into an escrow account which ensures that these payments will be paid on time. The remaining part of the taxes and insurances are paid along with the monthly mortgage payments in order to protect the lender from tax liens and uninsured losses.

The monthly mortgage payments include the following:
  • The loan principal is the amount that you borrow in order to purchase a property.

  • The interest that you pay for taking the loan. The interest payment depends on the mortgage rate which fluctuates with changes in the economy.

  • Escrow payments including property taxes and insurances to prevent losses against fire, theft, and disasters.

  • PMI (Private mortgage insurance) premiums which you require to pay along with monthly instalments in case you have made a down payment of less than 20% of the sale price or home value, whichever is less.


Apart from these, there are three important things on mortgage that you need to remember.

Mortgage term:

The mortgage loan is paid off within a specified time period known as the loan term that varies from 10 to 50 years. The monthly payments vary depending upon fluctuation in rates as in case of adjustable-rate mortgages, or ARMs. The payments also change on the basis of fluctuation in taxes, and insurance premiums for both ARM and fixed-rate mortgages (FRMs).

Ownership of the property:

While you are repaying the mortgage, the title of ownership of the property still remains with you. But if you fail to pay off the outstanding balance, the lien created in the mortgage allows the lender to take away your home. He or she gets the right to sell off the property in order to get back the loan balance.

Information on mortgages:

You may apply for a mortgage with a bank, a credit union or a broker, depending upon your requirements. But you should have detailed information about mortgages and you need to shop around for the best loan package, that is, which offers a reasonable rate and does not require extra charges in the form of hidden fees.

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Related References:
Posted on: 12th Apr, 2004 12:01 am
You, the borrower, may have the desire of getting a home of your own, but lack of finance may prevent you from fulfilling your dream. This is where proper knowledge on the basics of mortgage can help you a lot. It provides a financing option that can make your dream come true. Proper information on mortgage can help you get the best deal.


What is a mortgage?

Mortgage is a legal process through which you take out a loan for the purchase of residential or commercial property from a bank or a financial institution, also known as the lender. The same residential or commercial property is kept as the security for the loan that you have taken out.
Anyways, if you take out a mortgage loan, you have to repay it. Mortgage lenders are concerned with your financial ability to repay the loan. In order to judge your creditworthiness, they take into consideration the following things -
  • Credit score
  • Your monthly gross income
  • The down payment amount
  • Assets

Repayment of the loan

In order to repay the loan, you have to make monthly mortgage payments. The monthly mortgage payments include the following:
  • The loan principal is the amount that you borrow in order to purchase a property.
  • The interest that you pay for taking the loan. The interest payment depends on the mortgage rate which fluctuates with changes in the economy.
  • Escrow payments including property taxes and insurances to prevent losses against fire, theft, and disasters.
  • PMI (Private mortgage insurance) premiums which you require to pay along with monthly instalments in case you have made a down payment of less than 20% of the sale price or home value, whichever is less.
This amount is determined on the basis of the mortgage rate of interest. The interest rate charged on your loan depends upon your credit score, discount points and down payment. Getting a lower rate is also possible if you can pay a part of the loan amount as prepaid interest or points. You may get a loan at fixed rates, variable or adjustable rates or a combination of both the rates. Have a look at fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs).

FRMs

Mortgage rate in case of FRMs is fixed. The borrower has to pay fixed monthly mortgage amount to the lender under this agreement. In other words, the mortgage payment remains same throughout the term of the loan.

ARMs

Mortgage rate in case of ARMs varies with the change in the market rate of interest. So, the monthly mortgage amount that the borrower pays to the lender also varies under this agreement. Here, the mortgage amount varies over the term of the loan.

How mortgage loan process works?

The loan application that you have submitted goes through a process of review before the lender gives his or her approval. The lender appoints a person, who is known as underwriter, to judge your creditworthiness. The mortgage underwriter verifies your loan application and gives green or red signal to the lender. After the lender approves the mortgage, he/she decides upon the date of closing. The closing involves the signing of legal documents including a mortgage note which obligates you to repay the loan on time.
At closing, the lender requires you to pay the costs of originating and processing the loan. You will also have to deposit property taxes and insurance premiums into an escrow account which ensures that these payments will be paid on time. The remaining part of the taxes and insurances are paid along with the monthly mortgage payments in order to protect the lender from tax liens and uninsured losses.
To sum up, mortgage loan helps you in fulfilling your dream of owning a home. The loan however has to be paid off within a specified time period known as the loan term that varies from 10 to 50 years. Again, while you are repaying the mortgage, the title of ownership of the property still remains with you. But if you fail to pay off the outstanding balance, the lien created in the mortgage allows the lender to take away your home. He or she gets the right to sell off the property in order to get back the loan balance. You may apply for a mortgage with a bank, a credit union or a broker, depending upon your requirements. But you should have detailed information about mortgages and you need to shop around for the best loan package, that is, which offers a reasonable rate and does not require extra charges in the form of hidden fees.

Tips for a first time home buyer

Buying a home, especially for a first time home buyer, is indeed a very challenging task. Chances are there that out of excitement to own your dream home, you may commit mistakes. Here we briefly discuss about some important things that you need to consider before taking out a mortgage loan.

Type of home

First of all, you need to fix up your mind regarding the type of home that you want to buy. It may be a traditional home, a condominium, a single-family house or a multi-family house.

Amount of mortgage loan

You need to know the approximate amount of mortgage loan that you will qualify for. This will help you a lot to make the right purchase.

Your affordability

You will have to repay the mortgage loan that you take out. Make sure that the mortgage loan that you have taken out is well within your affordability.

Costs of a mortgage

Apart from the monthly mortgage payment amount, a mortgage loan may also include various other costs such as closing costs, taxes, loan processing fees etc. You should have perfect knowledge about all the costs associated in a mortgage loan.
All these considerations will surely help you a lot to make the right mortgage purchase.
what are the things to look out for in a morgage valuation process
Posted on: 25th Sep, 2008 07:40 am
Hi prince!

Welcome to Forums!

Mortgage Valuation Process is a basic form of survey which is required by lenders in order to determine the appropriateness of the property as security for their loan. Though the borrower will get a copy of this report it should not be relied upon as a comprehensive report on the situation of the property. Borrowers should ask for a detailed report - Home Buyers Report or Structural Survey. Always remember that the surveyor is not acting on your behalf, he is working for the lender.

Feel free to ask if you have further queries.

Sussane
Posted on: 27th Sep, 2008 12:09 am
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Thanks
Posted on: 08th Apr, 2009 03:47 am
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Posted on: 08th Apr, 2009 03:49 am
me and my husband are wanting to purchase a new mobile home this will be our first home to buy. Is there some way we can get help with purchasing the home without a down payment or getting assistance with the down payment.
Posted on: 10th Jan, 2013 06:00 am
Hi Brandi,

You can contact your family and relatives to find out if someone can gift you money for the down payment. Apart from this, you can check out the given pages for further information:
"http://www.calhfa.ca.gov/homebuyer/programs/chdap.htm"
"http://www.fha.com/fha_programs.cfm"

Thanks
Posted on: 10th Jan, 2013 09:50 pm
1st - I currently have a score of 630, which has been going up because I have a credit repair company working on it… I hope to have a score of 670-700 by June, if not can I qualify for a loan of $150,00-180,00?? I have an annual income of $70,000.00, I really want to purchase a home in June /July.

2nd - If I apply for a loan and get denied will that mess up my credit?? :?
Posted on: 04th Apr, 2013 07:53 am
Hi Alexis,

If you have a score of 700 or more, then you can qualify for a conventional loan. But if you have a low score, then you will have to go for a FHA loan. Applying for a loan and getting denied for it may have a small negative impact on your credit.
Posted on: 04th Apr, 2013 10:23 pm
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