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Scary word, isn't it? "Mortgage." It sounds like the name of a disease and it sort of is. A home mortgage is basically a fancy word for "house loan" instead of paying for the house all at once at the beginning, you pay a little bit every month. An agency covers you for what you haven't paid yet, and you continue to pay the mortgage until you finally own the house outright and payoff your home mortgage loan (say, 15 to 30 years later).
A monthly mortgage payment consists of:
- Principal - repayment of the original loan amount borrowed.
- Interest - the cost of borrowing the principal loan amount.
- Taxes - real estate taxes.
- Insurance- homeowners insurance.
Together, this is known as the PITI (Principal/Interest/Taxes/Insurance) payment. You may also think of it as the "Lord have PITI on my payment."
There are several factors involved in getting a mortgage:
According to the Home Buyer's Information left, most buyers purchase houses that cost between 1.5 - 2.5 times their annual income. However, in some areas, there may not be houses available in that range, so you may need to spend a bit more. Keep in mind that your monthly mortgage payment should not exceed approximately 28% - 29% of your gross monthly income. That's because your total debt payments (car, credit cards, plus the monthly mortgage, whatever) should not exceed 36% - 40% of your gross monthly income. After all, you have to eat.
Pre qualification and pre approval
With these ratios in mind, it's now time to get pre qualified and pre approved for a mortgage. You may be thinking, "Why do I need a mortgage if I haven't even looked at any houses?" It evokes the chicken and egg scenario: Which comes first? The mortgage or house? When it comes to buying a house, you get pre-approved for the mortgage loan first because it will determine how much you can spend. And to get pre-approved, you must get pre-qualified (that is, you have to qualify for pre approval letter).
To get a pre-qualified mortgage loan you will need to supply your financial lender with a detailed loan financial statement & credit application, plus the following financial information about yourself:
Your current income. Gather W-2's and federal & state income tax returns from the last 2 or 3 years, copies of paycheck stubs, and bank statements from savings and checking.
Your credit history. Credit reporting agencies can be contacted online for a credit report, even a free credit report is available. A paid credit report will cost about $10 - though it's free in some cases.
If upon checking your credit report and Fair Isaac Score (FICO) you see there are some negatives to your credit rating you should try to get any obvious credit blemishes either removed or updated with better looking credit data before your mortgage loan application is processed by your lender. By knowing all about credit repair and credit protection, your home mortgage loan is more likely to be approved and carry a beneficial low interest rate too!
The amount of debt you are carrying. So gather your billing statements for your credit cards, other loans, bank and auto loans, alimony, etc.
Fixed rate home mortgage loans (commonly 15/yr or 30/yr vs adjustable rate (ARM) mortgage
There are two types of mortgage loans - fixed and adjustable-rate (ARM) mortgages.
On a fixed-rate mortgage, there is a fixed term (for example, 15 to 30 years) and a fixed interest rate at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage. Taxes and insurance are not guaranteed.
On an adjustable rate mortgage, also known as an ARM (Adjustable Rate Mortgage), the interest rates are adjusted up or down according to current interest rates, established by the Government. The principal and interest payment goes up and down with these rate changes as well.
Your home-mortgage will also depend on the amount of your down payment (that is, how much money you'll fork over up front). Most home buyers make down payments of 5% - 15% of the total home price. However, you may qualify for a lower down payment because of the various types of home buyer's loans that are available. There are all kinds of loans to consider: first-time home-buyer loan programs, Veteran's Administrations (VA) loans, HUD Loans, and Federal Housing Administration, federal housing authority guaranteed FHA Loans. There may even be home-loans associated with the neighborhood you're buying in to encourage more people to move into that particular area. This is another topic of discussion to have with your mortgage lender.
Yet another factor to consider is the amount of points you are willing to pay with your mortgage loan. A point is 1% of your mortgage loan amount. Points are usually paid for up-front. If you can (and are willing) to pay points, then it will bring down your interest rate and potentially, your closing costs.
Locating a mortgage agency
So how do you find a financial institution to approach for a mortgage?
The main financing advice we can offer you is to compare as many funding sources as possible.
Check latest home mortgage interest rates for your area. These are usually listed in the Real Estate section of your local newspaper, often on Saturday or Sunday.
Keep in mind, whomever you choose, once the mortgage lender is finished pre-qualifying you Mortgage Loan Application, they will want to pre-approve you for the highest loan amount your income can afford - in other words, they want you to pay as much as you can possibly afford every month. Whatever you do, don't go out and buy a house for that amount. Buy something lower priced with more moderate mortgage loan payments.
You may need the extra income surplus for possible unknown expenses like
higher mortgage loan closing costs, home repairs, moving costs, additional furniture, lawn
tools, remodeling, medical bills, etc. Also consider your monthly expenses for utilities
and homeowner maintenance may also increase.