Home Buying Q&A
What is a mortgage?
A mortgage is a loan secured by real estate. The mortgage itself is a lien on the home or property that secures the promise to pay the debt.
How does a mortgage work?
In return for the funds to purchase a home, a lender gets your promise to pay back the funds over the period of the loan at a certain cost. The property backs your promise. The lender takes over ownership of the property if you default, or stop paying your monthly payments on the loan.
What is included a mortgage payment?
A monthly mortgage payment usually includes: principal, interest, taxes and insurance (PITI). It can also include maintenance expenses, such as condominium homeowners' association dues.
The principal is the amount in the monthly payment that reduces the original amount borrowed. The interest rate is the fee charged to borrow the outstanding balance for the past month. In addition, a monthly amount may be collected and held in a separate escrow account to cover property taxes, homeowner's insurance and mortgage insurance. Your lender uses the money in the escrow account to pay your tax and insurance bills, as they come due.
How do I qualify for a mortgage?
Lenders use four basic standards to approve applicants for a mortgage: capacity, character, capital and collateral.
Income (Capacity) Steady and sufficient income is needed to make your monthly payments. It can come from a variety of sources including primary, second or part-time jobs, overtime and bonuses, commissions, self-employment, retirement benefits, pensions and annuities, public assistance, child support, alimony, veteran's benefits, disability payments ro rental property income.
Credit History (Character) Lenders check to see if you have: paid back money you borrowed in the past, been late in making payments or filed for bankruptcy. If you have limited or no credit history, a "nontraditional" credit history will be considered. Receipts or canceled checks for rent and utility payments document a pattern of paying your monthly obligations on time.
Savings (Capital) Lenders want to see that you have capital to fulfill your current obligations. Ideally, you should have enough savings to act as a source of funds for your down payment and several months of reserve funds to cover your anticipated monthly mortgage payments should anything happen to you or your job.
Property (Collateral) Your lender will require an appraisal on your home to determine its market value in comparison to similar houses that sold recently in the neighborhood. Your lender will also look at the type of the property and whether there are additional fees such as homeowner's association dues. If you'd like to be pre-approved for a mortgage loan, you do not need to have a property in mind. You can actually get a conditional approval pending the property appraisal, if you qualify.
How much home can I afford?
Lenders look at your credit history, the cash you have available for a down payment and closing costs, your income and your existing debt and financial obligations. Then, taking the current market interest rate into account, a lender can give you an estimate of the maximum mortgage amount you can afford. Lenders consider your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29 percent of gross income, while the mortgage payment, combined with non-housing expenses should total no more than 41 percent of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
What is a loan to value (LTV) and how does it determine the size of my loan?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95 percent LTV loan on a home priced at $100,000, you could borrow up to $95,500 (95 percent of $100,000), and would have to pay,$5,000, as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80 percent or more) usually require mortgage insurance policy.
How important is my credit?
Your credit report is an important consideration to lenders reviewing your financial profile. If you have a history of paying your monthly obligations on time, that's a signal to a lender that you are likely to make your monthly mortgage payments on time as well. So your credit can be a factor in the kind of mortgage program you may qualify for. Your credit history can also affect the amount required for a down payment, the amount of money you can borrow in relation to your income, and the interest rate you are offered. Even if you have no established credit history or less-than-perfect credit, there are still loan programs that can help you buy a home
How Much Do I Need for a Down Payment?
Today's flexible home loan programs allow buyers to put very little down (3 percent or less). In fact, you may qualify for programs that don't require down payments at all. Some homebuyers may be eligible for local down payment assistance programs
What are closing costs?
Closing costs cover the amount of money you pay to close a mortgage loan aside from the down payment. The amount you pay in closing costs varies among lenders, mortgage products and localities. Points are fees, with each point representing 1 percent of your loan amount, that cover the cost of your mortgage loan.
Can I pay off my loan ahead of schedule?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal..
Are there special mortagages for first-time homebuyers?
Lenders now offer several affordable mortgage options to help first-time homebuyers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt or have experienced income irregularities. For more information on homebuying visit the U.S. Department of Housing and Urban Development at http://www.hud.gov