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Home Loans And Mortgages: A Basic Introduction

Mar 23, 2008
When you buy a home, whether it's a single-family house, townhouse, co-op or condominium, you're probably going to need a mortgage. For first-time buyers who may not have a lot of down payment cash to deposit, getting the right mortgage is absolutely essential. The size and type of your mortgage will determine how much you can afford and the cost of borrowing that money.

As you head into the mortgage loan process, there are a few critical questions and issues you will need to address to ensure you are getting the best deal available at the time. The difference, for example, between seemingly small amounts on interest rates can add or reduce the overall amount you pay the lender by many thousands of dollars over the life of the loan. So it pays off to do some up front homework.

How Much Can I Afford?

The first step in any house hunt is finding out how big of a mortgage you can actually afford. To qualify for any home loan, you have to pass a bank test, but you should try testing yourself first before you even set foot in a bank.

If you're walking in with a down payment of 10 percent of the purchase price, most lenders will only approve you if your total monthly housing expenses (that's mortgage payments, real estate taxes, house insurance and maintenance costs) equals 28 percent or less of your gross monthly income.

In addition, your total monthly debt payments (that includes credit card debt, car loans, mortgages, student loans and lines of credit) should be less than 36 percent of your gross monthly income.

To determine how much money you can actually afford to borrow, you need to estimate an interest rate and the term (or length) of a mortgage. You also need to estimate your principal, property taxes and insurance expenses. Basically, a monthly mortgage payment is comprised of four components - Principal, Interest, Taxes and Insurance. This formula is known as PITI.

Property taxes and insurance will differ depending on the house while interest rates will vary depending on the loan and the lender. Still, you can get a rough estimate.

Can I Pre-qualify For a Mortgage?

Yes and it's often a good idea. Before you invest time and energy into house hunting, it's very helpful to pre-qualify for a mortgage so you know exactly how much you can spend and where you can focus your house hunting efforts. This also helps the seller gain confidence that you are a verifiable buyer and not someone who will ultimately waste their time.

Remember, mortgage lenders and financial experts have two different ideas about how much you can actually afford. If you pre-qualify for a high mortgage, but you're concerned about whether you can actually afford the monthly payments, discuss it first with a qualified financial planner or adviser.

How much money do I have to put down on a home loan mortgage?

Traditionally, lenders wanted a 20 percent down payment on most mortgages, meaning they'd cover the other 80 percent of a home's purchase. However, with private mortgage insurance, prospective homeowners can often purchase with down payments as low as 5 percent.
About the Author
For information on practical home ownership preparation ideas, please visit www.home-ownership-preparation.com, a popular site providing great insights concerning home inspection tools , FHA mortgage rates , stop foreclosure sale info, and many more.
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