Unless the plan is to pay cash for the house you hope to buy, you need to obtain a home mortgage loan. Home mortgage loans vary from one lender to the next, and from one type of loan to another. In other words, it’s not as simple as walking into a bank and filling out a one-size-fits-all application. Here are some basics to understand about home mortgage loans.

Mortgage Pre-Approval

You should be pre-approved for a home mortgage loan before you begin shopping for houses. Applying for home loans takes time and requires verification of ample information. Sellers may not be willing to wait for your application process or risk possible denial of your application.

Banks and mortgage brokers finance home mortgage loans. Not all of these financial institutions are credible. Before applying, research the lender, review their history, and verify that they’re a reputable source.

When you borrow money to pay for real estate, you pay a small portion, such as a 20 percent down payment, and the lender pays the balance. You agree to pay the bank back over a specified amount of time, including interest.

Your Savings & Credit Score

To qualify for a home mortgage loan, you not only have to provide a down payment, but you’ve also got to provide a clean and positive credit report, have no major recent purchases, and be able to prove your income and your debt-to-income ratio.

In cases where your credit falls short, or your debt-to-income ratio is too high, you may be able to use a co-signer to support your application. However, when you use a co-signer, that person accepts full responsibility to pay the balance of the loan if you default on payments.

Each time an institution runs a credit check to view your report, your credit score lowers slightly. Too many credit checks within a certain amount of time can be damaging. For this reason, do not apply for multiple home mortgage loans, and only apply to the lender you determine is best for you.

The home you’re buying becomes collateral for the loan. When you use the house you’re buying as collateral to obtain the loan, it means that if you fail to make your mortgage loan payments, the bank has the legal right to foreclose on the property, repossess the house, and try to recoup their funds by reselling the house to another buyer.

Choose Your Terms

Based on your qualifications and the lender, you can choose the term, or the lifespan of the loan, which can extend up to 30 years. Shorter lifespans mean larger monthly payments whereas longer terms equate to smaller monthly payments.

Explore Different Loan Types

Another choice you have regarding your home mortgage loan is interest rates. There are two types of interest rates available. The first kind is known as a fixed interest rate. A fixed interest rate may be higher each month but is guaranteed not to change during the life of the loan. A variable interest rate might start out at a low level, creating lower monthly payments, but increase over time as market trends change.

There are various specialty loan programs available to qualified buyers, such as VA loans for military personnel, backed by the Veteran’s Association. Another type is FHA loans supported by the government for applicants meeting certain criteria. Special programs also exist for first-time home buyers. Each of these loan programs has pros and cons you should carefully measure to determine whether or not they’re beneficial to you.

What is PITI?

Your mortgage payments are divided into four parts: principal, interest, taxes, and insurance. Collectively, these categories are referred to as PITI.

The principal is the portion of the payment directly applied to the purchase price of the house.

The interest is the amount you owe the bank as a fee for lending you the money.

Taxes applies to property taxes which all homeowners pay. Insurance refers to homeowner’s insurance which is required by all homes purchased through home mortgage loans.  In some cases, borrowers must also secure private mortgage insurance such as when they don’t have the down payment or have less that ideal credit scores.

If you have excellent credit and are not an at-risk buyer, you have the option to pay taxes and insurance independently. Otherwise, the tax and insurance portions of your payment are held in an escrow account, a type of untouchable savings account, from which those bills are paid when due.

Research lenders, understand the variables, know the risks, and secure your investment by choosing the lender best suited to your needs.

Your real estate agent is the best source of information about the local community and real estate topics. Give Melanie McLaughlin a call today at 505-489-8504 to learn more about local areas, discuss selling a house, or tour available homes for sale.