What is a mortgage?

If you are considering buying a home in the coming weeks or months, you may be taking time to learn more about the financial aspect of purchasing a home. While you certainly want to find a home that meets your needs with regards to size, number of bedrooms and so forth, you also need the financial means necessary to purchase the home. While you can pay cash for the purchase of your new home, most people will apply for a mortgage to fund their purchase.

How A Home Loan Works

A mortgage, otherwise known as a home loan, is a loan that uses your new home as collateral for the purchase. Your home lender will be listed as the lien holder on the property's title. The lender will have the ability to foreclose on your home if you do not make payments on your home loan as agreed. Once the loan has been paid in full, the lender will be removed from title. At that time, you will have full and complete ownership of the property.

Different Loan Terms

While it is easy to lump all home loans together in a group, the fact is that many lenders offer different loan terms to you, and they may also have different requirements you must meet in order to qualify. For example, the interest rates and fees offered by different lenders commonly vary. In addition, requirements for your credit scores, your personal debt-to-income ratio and more may also vary from lender to lender. To find the most success when shopping for a new home loan, you may consider reviewing your own credit scores and working with a mortgage broker to get prequalified for the best loan terms possible.

What Happens at Closing

If you plan to use a home loan to pay for your new home purchase, you will need to be approved for your home loan prior to closing on your home purchase. Once you have been approved to close on your loan, the title company or real estate attorney who is assigned to handle your closing will prepare a closing statement for both you and the seller. The closing statement will itemize each of the loan charges that will need to be paid off at closing as well as all sources of funds that are being used to pay for those charges. The charges you may be responsible for include title fees, lender fees, the actual sales price of the home and more. The credits that may be listed on your behalf include the full amount of loan proceeds as well as your down payment. The title company will handle wiring funds to the appropriate parties. You will only be required to pay for the down payment and any additional fees not covered by the loan amount. On the seller's side, your loan amount and down payment will be credited to the seller. The seller may use these funds to pay off his or her own mortgage, which would release their lender's claim on title to the property. Any additional funds will be shown as a profit to the seller. Ultimately, at closing, all parties who have a financial stake at closing will transfer funds, and title will be transferred from the seller to you.

A mortgage is beneficial and even necessary for so many home purchases. Many people do not have the financial means to pay cash when buying a home. Those who do may not want to relinquish such a sizable amount of money. By applying for a home loan, you can more easily afford to purchase a new home.

Common Mortgage Mistakes To Avoid

For most people, the biggest investment they will ever make will be their home. To afford a home, purchasers usually become a party to a mortgage agreement. A mortgage allows buyers to make payments over a long period of time to be able to afford a home. Increasingly, the media is reporting that due to the economy, many people are losing their homes. While the economy has played a role, there are common mistakes that can result in or contribute to foreclosure and bankruptcy.

To avoid mortgage mistakes, buyers need to know what the mistakes are. While not limited to the following, these mistakes represent some of the more costly and dangerous ones. Practices to avoid include the use of adjustable rate mortgages, buying with little or no down payment, amortizing the loan for longer than 30 years, getting involved in reverse mortgages, and entering into agreements involving non-standard mortgage products.

Adjustable rate mortgages are a great deal, if home values increase. With an ARM, rates are initially set low and purchasers enjoy affordable payments. At the end of two to five years, the rate increases. If home values have increased, the owner can refinance using equity from the increased value. However, if the value has decreased, refinancing may not be possible. Higher rates result in higher payments and payments that were once affordable can become overwhelming.

No down payment is a mistake that can hurt all parties. The borrower has no equity and has higher payments than they would with a down payment. For lenders, borrowers with no down payment are riskier. With little or no equity, it is easier for borrowers to walk away. This is particularly true for those whose property value has declined to the point that the borrower owes more than the house is worth.

For years, a 30-year mortgage was the longest term a purchaser could obtain. Now, it is common to see 35-40 year mortgages. This results in lower mortgage payments. However, over the life of the loan more interest is paid. In fact, for 10-20 years very little equity accrues because so much is being paid to interest. With minimal equity, it becomes harder to sell a home.

Reverse mortgages are for those 62 and older. With a reverse mortgage, the equity in the property is paid out as a stream of monthly income or as a lump sum. They are costly to obtain. Also, with no equity left, the bank becomes the owner of the home. If the borrower dies, everything must be paid off before any equity can be returned to the family. This can be very problematic if family members still live in the home.

Finally, non-standard mortgage products can result in unanticipated situations. These products allow the borrower to dictate the specifics of the loan including the amount of the payment. In return, a large balloon payment usually comes due. Ultimately, a negative equity situation can be created as well.

Home ownership is the dream of many and many have managed to buy a home. Unfortunately, it is often easier to buy a home than it is to keep a home. Avoiding the five mortgage mistakes above is one way to make sure that a home remains where is belongs, with its owners.

What is a Mortgage Broker and why use one?

The decision to buy a new home is a big decision indeed. You may have functional needs to consider, such as the need to have more living space for a growing family. You also have budget considerations in mind, such as how the mortgage payment of a new home will affect your budget. When considering your new budget after your home purchase is complete, the monthly payment of your new home loan is typically the most significant change to consider. If you are like many home buyers, this payment will likely be your largest monthly expenditure throughout the time you own your home. It makes sense that you would want to find the best loan terms possible. When shopping for a new home loan, you can either shop for loans on your own, or you can choose to work with a mortgage broker.

What Is a Broker?

A broker is a highly trained expert in home loans, and he or she can be engaged to work on your behalf to find the best loan possible for your needs. When you contact a broker, he or she will first sit down with you to identify your needs. Through this initial process, he or she can help you to learn the maximum sales price you may qualify for and why. In addition to working with you to help you to identify a maximum loan amount you may qualify for, a broker also assists you with the entire loan process and will guide you through the process until your new loan closes.

Finding the Best Loan

One of the most significant services a broker can offer to you is the service of shopping your loan request to different lenders. A broker has a thorough understanding of the loan requirements different lenders have in place. This knowledge will be utilized on your behalf to find you the best loan terms possible. Depending on your specific needs and desires with regards to your loan request, it may mean working with a lender who will approve you for the highest loan amount, who will be agreeable to lending to you despite certain unique situations with your loan request, who are able to work with lower credit scores and more. Each borrower has a unique loan request, and a broker is able to review the specific details of your own loan request to help you find the best loan possible.

The Affordability of the Loan

Many of the most skilled brokers will also go a step beyond to help ensure your new loan payment and even your new home in general are affordable for you. Many people have heard of others who have bought more house than was affordable to them, and they ended up having their home foreclosed on. An expert broker can review your finances and help you to analyze the true cost of a specific home. This may include analyzing the loan payment, the property taxes and the homeowners insurance premium. While one lender may offer you a loan with a different monthly payment than another, one lender may also have different homeowners insurance requirements in place. The true cost of working with a specific lender can be analyzed by a top broker.

If you choose to work with a mortgage broker, you will be required to pay a broker fee at closing. However, the benefits you can enjoy by working with a broker typically far outweigh the fee charged.

Mortgages for First Time Home Buyers

If you are a first-time home buyer, you can pursue your dream of owning a home. Owning a home may be easier than you realize with the assistance of FHA loans. FHA loans are distributed by the Federal Housing Authority, and they may given to people with bad credit or extensive student loans.

Your first step in trying to obtain an FHA loan should be to save up the cash for a down payment on your home. Traditionally, lenders will tell you that having 20 percent for a down payment on a home is a good idea. When you are in the position of applying for an FHA loan, you likely do not have the cash for this large down payment. FHA loans are beneficial and can provide some relief to the first time home buyer, because they only require that a person pay three percent of the value of a home upfront.

FHA loans will allow people with a high debt-credit ratio to obtain loans. Even if you have student loans, you may still be able to qualify for an FHA loan.

You should consider your budget before you apply for a mortgage. You should be able to confidently anticipate your budget for the next couple years during the period in which you will own the home. Be sure that you can afford the mortgage of the home you want to buy. Do not try to live beyond your means. Also, prepare for the event that you or your spouse loses a job.

When you do find a home that fits within your budget, you can then meet with lenders to see whether you pre-qualify for a loan. The lender will run a credit check and seek to determine how much "house" you can afford. If you are self-employed, you should be aware that a report for two years of your income will be required. A lender will typically want to see that you have had a consistent income for a period of two years. This can assure the lender that you will be able to afford the house in an economic downturn.

Also, a first time home buyer should ask a lender about any state programs that help first time home buyers. In states like Georgia or Florida, one can take advantage of first time home buyer programs. The loans that are available through statewide programs will typically have lower interest rates than traditional loans.

A lender will want to provide a first time home buyer with a mortgage that is no more than 25 percent of a person's monthly income. One should be prepared to meet with a lender by calculating how much he or she can afford in monthly payments. A first time home buyer should also take other costs into consideration. Costs like utility bills, landscaping costs and HOA fees can add significantly to the monthly costs of a home. One should make sure that he or she has fully outlined all of these expenses and is prepared to handle them.

Meeting with a lender can help a person get on the right track for pursing a mortgage. Even if one is thinking about buying a house in one or two years, meeting with a lender can help him or her get organized in the process.