Know what Mortgage is all about

Buying a home is the biggest dream of many. But not all can afford it. Here is where a mortgage can help a person purchase a new home, construct a property, or even renovate an existing home.

A mortgage is basically a home loan which can be used to purchase a residential or commercial property. Here the same property is used as a security to guarantee the re-payment of the loan. It means that if you don't make your payments, the lender may take away the property to cover your missed payments. The borrower is referred as the mortgagor and the lender as the mortgagee.

Who offers the loan?

You can get the loan either from a bank, credit unions, private lender or from any brokerage firm. You need to shop around with them and choose a reasonable loan program depending on your affordability and the particular loan offer suiting your needs.

What are the major types of loan?

There are basically two categories of home loans available in the market:-

Fixed Rate Mortgage: It is a loan with a specific interest rate that remains fixed throughout the term of the loan. It allows you to know exactly how much you have to pay each month.

Adjustable Rate Mortgage: It is a home loan in which the interest rate and the monthly payments are adjusted frequently according to the current market condition. It is based on a particular economic index.

What are the qualifying factors for a mortgage?

In general, the lender considers the following factors to approve you for a loan:-

Credit score: The interest rate charged on your loan depends upon your credit score.The higher your score, the lower is the rate offered.

Down payment: The loan amount you can borrow depends on the value of your home and the amount of the cash you pay as down payment. If you put more money as down payment, your mortgage payment will be less as you may get a lower interest rate.

Debt-to-income ratio: If the total payment on your debts does not exceed 36% of the gross monthly income, then you may qualify for the mortgage. Lenders consider the ratio as an important factor to determine if you can repay the loan. For FHA loans, the ratio must not exceed 41% of the gross monthly income.

How to get a mortgage?

Once you have decided to go for a mortgage, you need to find out the required criteria to qualify for it. You have to provide the lender with information related to your income, credit score, assets and current debts. The lender, in turn, will give you an idea of the maximum loan amount you can borrow. This is known as pre-qualification.

After you get pre-qualified, you need to compare the lenders on the basis of their loan offers and the required payments. Then you may apply for a loan. After you are approved for the loan, the lender will decide upon the date of closing. The closing involves signing of the legal documents at the office of the Register of Deeds. The lender will require you to pay for the costs of originating the loan and the application fee. You will also have to pay property taxes and insurance premiums into an escrow account which assures that these payments will be made in time.

Thus, mortgage gives you the chance to build up or to have an asset of your own.

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