A loan provided by a mortgage lender or a bank that enables an individual to purchase a home
A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you've borrowed plus interest.
Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.
Seven things to look for in a mortgage
- The size of the loan
- The interest rate and any associated points
- The closing costs of the loan, including the lender's fees
- The Annual Percentage Rate (APR)
- The type of interest rate and whether it can change (is it fixed or adjustable?)
- The loan term, or how long you have to repay the loan
- Complete Understanding Of Mortgage
- Types Of Mortgages And Overview
- Common underwriting conditions
- Mortgage Payments
- Additional paperwork
Lenders will tell you how much you are qualified to borrow that is, how much they are willing to lend you. Several online calculators will compare your income and debts and come up with similar answers. But how much you could borrow is very different from how much you can afford to repay without stretching your budget for other important items too thin. Lenders do not take into account all your family and financial circumstances. To know how much you can afford to repay, you'll need to take a hard look at your family's income, expenses and savings priorities to see what fits comfortably within your budget.
Don't forget other costs when coming up with your ideal payment.
Costs such as homeowner's insurance, property taxes, and private mortgage insurance are typically added to your monthly mortgage payment, so be sure to include these costs when calculating how much you can afford. You can get estimates from your local tax assessor, insurance agent and lender. Knowing how much you can comfortably pay each month will also help you estimate a reasonable price range for your new home.
Types of Mortgages
The two most common types of mortgages are fixed-rate and adjustable-rate (also known as variable rate) mortgages.
- Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) come with interest rates that can and usually, do change over the life of the loan. Increases in market rates and other factors cause interest rates to fluctuate, which changes the amount of interest the borrower must pay, and, therefore, changes the total monthly payment due. With adjustable rate mortgages, the interest rate is set to be reviewed and adjusted at specific times. For example, the rate may be adjusted once a year or once every six months.
One of the most popular adjustable rate mortgages is the 5/1 ARM, which offers a fixed rate for the first five years of the repayment period, with the interest rate for the remainder of the loan’s life subject to being adjusted annually.
While ARMs make it more difficult for the borrower to gauge spending and establish their monthly budgets, they are popular because they typically come with lower starting interest rates than fixed-rate mortgages. Borrowers, assuming their income will grow over time, may seek an ARM in order to lock in a low fixed-rate in the beginning, when they are earning less.
The primary risk with an ARM is that interest rates may increase significantly over the life of the loan, to a point where the mortgage payments become so high that they are difficult for the borrower to meet. Significant rate increases may even lead to default and the borrower losing the home through foreclosure.
Mortgages are major financial commitments, locking borrowers into decades of payments that must be made on a consistent basis. However, most people believe that the long-term benefits of home ownership make committing to a mortgage worthwhile.
- Fixed-Rate Mortgages
Fixed-rate mortgages provide borrowers with an established interest rate over a set term of typically 15, 20, or 30 years. With a fixed interest rate, the shorter the term over which the borrower pays, the higher the monthly payment. Conversely, the longer the borrower takes to pay, the smaller the monthly repayment amount. However, the longer it takes to repay the loan, the more the borrower ultimately pays in interest charges.
The greatest advantage of a fixed-rate mortgage is that the borrower can count on their monthly mortgage payments being the same every month throughout the life of their mortgage, making it easier to set household budgets and avoid any unexpected additional charges from one month to the next. Even if market rates increase significantly, the borrower doesn’t have to make higher monthly payments.
- Common underwriting conditions
Mortgage underwriting has been much in the news because of speed and automation. It’s true that mortgage approvals can happen much faster than in the past. Lenders increasingly have direct channels which allow them to instantly get banking and tax information.
There’s less searching for strange paperwork or missing pages with such systems. With today’s data storage options and access, borrowers can be initially approved with electronic speed.
For lenders, the story is very different. Lenders must verify that borrowers have the ability to repay the loan. They must be certain that every loan application claim made by borrowers is fully correct. Loan originators must be sure the borrower and the property meet standards established by mortgage investors and insurers if necessary.
- Mortgage underwriting
Mortgage underwriters the folks who check all the paperwork want to see the loan go through.
Why? Lenders don’t make any money when loan applications are declined. At the same time, underwriters must protect lenders’ interests. Improperly-originated loans can mean big fines, loan buy-backs and legal claims. Mortgage underwriters are there to make sure the loan package is correct and complete.
So even when the computer says “yes,” borrowers may still face hurdles. It’s best to think of all loan approvals as conditional, at least until you see a check.
- Mortgage Payments
Mortgage payments usually occur on a monthly basis and consist of four main parts:
- 1.Taxes: In most cases, mortgage payments will include the property tax the individual must pay as a homeowner. The municipal taxes are calculated based on the value of the home.
- 2.Insurance: Mortgages also include homeowner’s insurance, which is required by lenders to cover damage to the home (which acts as collateral), as well as the property inside of it. It also covers specific mortgage insurance, which is generally required if an individual makes a down payment that is less than 20% of the home’s cost. That insurance is designed to protect the lender or bank if the borrower defaults on his or her loan.
- 3.Principal: The principal is the total amount of the loan given. For example, if an individual takes out a $250,000 mortgage to purchase a home, then the principal loan amount is $250,000. Lenders typically like to see a 20% down payment on the purchase of a home. So, if the $250,000 mortgage represents 80% of the home’s appraised value, then the home buyers would be making a down payment of $62,500, and the total purchase price of the home would be $312,500.
- 4.Interest:The interest is the monthly percentage added to each mortgage payment. Lenders and banks don’t simply loan individuals money without expecting to get something in return. Interest is the money a lender or bank earns or charges on the money they loaned to home buyers.
Flood insurance
Lenders require flood insurance for homes in designated flood zones. Because floodplain maps are constantly being re-drawn, it may be that a property which did not require such coverage now does. A suddenly steeper cost may mean that a buyer no longer qualifies for financing.
Gifts
Gifts for down payments and closing costs are okay with virtually all loan programs. Lenders, however, can be very picky about who provides the gifts, and they want proof that the money is really a gift, not a loan. They also want statements to prove that the giver actually had the money in the first place.
- Additional paperwork
Automated systems may generate needs for additional documentation.
For instance, how do you explain that job gap? Why is your work history less than two years? Your bank records show a huge deposit last year. Where did you get the money? And if you have an ex-spouse and there are children or financial support involved, prepare to provide your divorce decree.
For investment properties, lenders want copies of all lease agreements. They’ll also want tax records. If the property has no rental history, the lender requires a licensed appraiser to complete a rental schedule showing the property’s fair market rent.
Do not apply for new credit or even use existing credit lines. If a loan program says you can only spend 43 percent of your monthly income on recurring debts, a larger account balance can push you over the limit. In the era of tight credit standards, new spending can move a mortgage application from “approved” to “declined.”
Underwriting conditions: one more reason to get pre approved
There are several steps borrowers can take to prevent post-approval surprises.
- First, to the extent possible, spend only cash in the period between signing a sale agreement and closing your loan. Do not add to credit card balances and do not open new accounts.
- Second, check your credit report at least two months before making a mortgage application. Do you see incorrect items that might lower your credit score? Any items so old they should not be reported? Contact the credit reporting agency if you find problems.
- Third, get mortgage pre-approval before home shopping. Have a loan officer submit a full application package for underwriting, including a credit report. See if any paperwork is missing or if any questions come up. A pre-approved buyer is almost as attractive to sellers as a cash buyer, and you’ll know how much you can safely spend.
- Lastly, start a folder to hold all of your paperwork, such things as tax returns, sale agreements, leases, and payroll stubs. As new material comes in, add it to the folder so that everything is up-to-date in case the underwriter needs more documentation.