It is the dream of almost every family to own their own home. However, very few people are in a financial position to purchase a home outright. A home mortgage loan will allow families to purchase a home by financing the home through a financial institution using the property as collateral. There are many variables to consider when considering how to get a mortgage loan, including the cost of the property, how much the buyer has to put toward a down payment, and what type of credit the borrower has. Obtaining a mortgage loan has several basic steps and takes careful planning on the part of the home buyer.
Determining goals and objectives
Buying a home is a major decision for a family and should not be entered into lightly. Before approaching a financial institution for a mortgage loan or shopping for home, it is necessary to evaluate goals and objectives. One of the major considerations will be how long the family plans to stay in the home. This will be a factor in determining what type of loan the buyer will need and how many years the term of the loan should be. How much money the family has to put toward a down payment on the home will also come into play as to what type of loan terms will be available when obtaining a mortgage. Furthermore, what type of credit the buyer has will be an important factor in determining financing choices. Home buyers must consider their income and how much they can afford for a monthly mortgage payment when choosing the type of home they wish to purchase.
Understanding different types of mortgage loans
There are numerous types of mortgage loans available for people in all financial situations regardless of whether or not they have ever purchased a home before and what type of credit they have. Understanding the most common types of mortgages will help a family determine which type is right for their unique situation.
- Fixed-rate mortgage loans: A very popular type of mortgage is the fixed-rate mortgage. The reason they are so popular is because the interest rate of the loan is locked in for the life of the loan. This gives buyers peace of mind in knowing the dollar amount of the monthly mortgage note will not increase over the life of the loan. The most common loan terms for fixed-rate mortgages are for 15 and 30-year terms. Payments during the first years of the mortgage go mostly toward paying the interest on the loan. By paying more than the amount of the monthly note and applying the additional amount towards the principal owed on the loan, a home buyer can pay off his home earlier than the finance-term of the loan.
- Adjustable-rate mortgage loans: The interest rate for an adjustable-rate mortgage can fluctuate up or down depending upon market conditions. With most adjustable-rate mortgage loans, the interest rate is fixed for the first few years of the mortgage. During the initial years of the loan, the interest rates are generally low. However, after the initial fixed-rate term is over, the interest rate of the loan can fluctuate up and down, and the terms will change every year thereafter. Generally, the fixed-rate term of the loan is three, five, seven, or ten-year terms. An adjustable-rate mortgage may be a good option for people who are not planning to keep their homes long-term and may sell in a few years.
- Sub-prime mortgage loans: Not everyone who wishes to buy a home has perfect credit. There are options available to home buyers who have bad credit. One of these options is a sub-prime mortgage. With a sub-prime mortgage, the home buyer will pay a higher interest rate. This is the price people with bad credit may have to pay to be able to purchase a home. Sub-prime mortgages are usually the best option for buyers who have a credit score less than 620. If the homeowner can improve his credit score after a few years into the mortgage, he may be able to refinance through a traditional lender at a lower interest rate.
The mortgage process
Not all mortgage lenders are created equal. Home buyers would be well-advised to shop around to find a lender who is willing to work with their unique circumstances and offer the terms and interest rates desired. Once a buyer finds a mortgage lender who will work with him, the next step is to get pre-approved. Getting pre-approved for a mortgage loan has a major advantage. Home buyers can approach real estate agents and let them know they are pre-approved for a certain dollar amount. The agent will be more willing to work with a buyer who has a mortgage pre-approval letter.
After pre-approval, choosing the home, and the seller’s acceptance of the offer to buy, closing will be scheduled. There is a lot of paperwork involved in the closing of a mortgage loan. The buyer should bring all the documents of the purchase to closing in case there is something he needs to refer to during closing. These documents include the contract, proof of insurance and title, the good faith estimate, proof of homeowners insurance, private mortgage insurance (if applicable), and home inspection and appraisal reports. It is also a good idea to do a walk-through inspection of the property 24 hours before closing to make sure the property is in good condition.
During closing, all parties will sign legal documents for the purchase of the home, and the buyer pays all required closing costs and any needed escrow funds. Once the buyer has reviewed and signed the necessary documents, the home is his to enjoy!
