Understanding Home Financing by fanzhongqing


									Step-By-Step Guide In Obtaining A Home Loan

Now that you've decided to purchase a new home, it's important to know what to expect
throughout the loan process. With the right knowledge, the road to home ownership is just

Choose A Home

Some lenders may offer a pre-approval, but others require that you have a specific home chosen
before they will discuss loan options. Therefore, the first step to obtaining a home loan is to first
select a home. Some sellers may require you to provide an earnest money deposit, which
secures the home while you obtain financing and have the necessary inspections completed in
order to finalize the purchase.

Check Your Credit

Before you even think about applying for a mortgage, it's important to know where you stand
from the lender's point of view. Checking your credit report is a good idea for many reasons,
but it's an essential step in your journey toward buying a home.

Every 12 months, you can request a free copy of your credit file from each of the three major
credit reporting agencies - Equifax, TransUnion and Experian. Look for inaccuracies, outdated
information or anything that requires your attention. If you spot anything, file a dispute right
away to get the information corrected. A free credit report does not include your FICO score,
which is available from the credit bureaus for a small fee. Most lenders use this number in
determining your interest rates and creditworthiness, so it may be a good idea to check it out for
yourself first.

Gather Your Documentation

When you apply for a loan, you will be asked to provide certain documentation and/or
information relating to your current financial status, employment, assets (including both real and
personal property) and liabilities. Before meeting with your lender, make sure to have your
current paystubs, bank statements, tax returns for the two years preceding your application and
information relating to any debts that you currently owe. If you are self-employed, you will also
be asked to provide a year-to-date profit/loss statement, which is also known as an income

Meet With Your Lender

Now that you have your documentation together, it's time to meet with your lender. At this
point, you will complete a mortgage application and submit it for approval. Depending on the
lender, it may take anywhere from several hours to several days before learning whether or not
you are approved. In most cases, however, a lender can provide you with an answer within 24

Last Minute Details

If your loan is approved, it's time to move forward to the next step in the mortgage process.
Your lender will order an appraisal and inspection to be completed on the property. This is just
as much for your own protection as it is for the lender because it may reveal hidden problems
within the home. The inspection and appraisal can take up to 30 days, at which point the results
will be forwarded to the lender. If all goes well, you will close on the loan and get ready to
move into your new home.
Types Of Home Loans

If you are in the market for a new home, it's important that you know what type of loans are
available to you. Whether you have perfect credit, a few financial blemishes or are just starting
out in life and want to own a home, understanding your options will prove to be invaluable
during your house hunting excursion.

Fixed Rate Mortgage

A fixed rate mortgage is one of the most popular home loans and is commonly available as a 15
or 30 year term. Because it offers the borrower an assurance that both the principal and
interest will remain the same throughout the term of the loan, a fixed rate mortgage is ideal for

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage, also referred to as an ARM loan, is one in which the interest rates
adjust according to the current market. This means that interest rates can either increase or
decrease at regular intervals, based on established market indexes.

Interest-Only Mortgage

An interest-only mortgage is one that requires the borrower to pay interest only payments for a
preset number of years during the loan term. After that initial period, the monthly payments will
then adjust to include both the principal and interest remaining on the loan.

Balloon Mortgage

A balloon mortgage is a loan that requires monthly payments that do not completely repay the
loan. At the conclusion of the balloon term, a large lump-sum payment is due to pay off the
balance of the loan.


An FHA and/or VA loan are mortgages that are guaranteed by the government. An FHA loan is
easier to qualify for than a conventional mortgage, requires a lower down payment and is
guaranteed by the Federal Housing Authority. A VA loan, which is for veterans only, is
guaranteed by the Veteran's Administration.

Construction Loan

Construction loans are available for borrowers who are purchasing or building a newly
constructed home. These loans, which are offered at either fixed or adjustable rates, require
slightly more paperwork and inspections than a conventional mortgage.

No Income/No Asset Verification

A no income/no asset verification loan simply means that the borrower will not be required to
verify their income or assets in order to obtain a mortgage. With this type of loan, the borrower
typically must have excellent credit and may be required to provide a down payment that's equal
to 20 percent or more of the total purchase price. Although this type of loan is called a no
income/no asset verification loan, the borrower may be required to show proof of both, but the
information will not be verified by any other means. Loans of this type are becoming increasingly

Owner Financing

Many homebuyers, especially those with a limited or poor credit history, prefer to seek owner
financing when purchasing a new home. Because there is no credit check, buyers will not be
judged for past credit problems. In addition, owner financing may offer a low down payment
requirement and competitive interest rates. While this may sound very attractive, it’s important
to remember that most owners simply cannot afford to offer financing as they themselves have
a mortgage, so this option is typically very difficult to come across.

How Much House You Can Afford

There are a number of factors that can contribute to the affordability of a house and, as a
potential homebuyer, it's important that you know what type of mortgage payments are within
your budget.

Debt-To-Income Ratio

As a homebuyer, your first consideration will be the amount of your monthly mortgage
payments. If you owe a lot of debt, lenders may consider you to be a high credit risk, which
makes debt-to-income ratio a leading factor in determining how much of a house you can afford.

Most lenders will discount any loans that you will have paid off within one year when
determining how much of a home you can afford. As a general rule, your mortgage payment
should not exceed 25-30 percent of your monthly take-home pay.

Loan Term

Although you will end up paying more interest in the long run, you will find that you can afford a
more expensive house if you request a loan term of 25-30 years, compared to a shorter term of
15 years.

Interest Rates

When you look at an interest rate, all you see is a number. Hopefully, it's a single digit that's
comparable with current market rates. Most homebuyers already know that their interest rate
affects their monthly payment which, in turn, is determined by the borrower's income. Lower
interest rates mean that you can afford a larger principal loan amount, which means a more
expensive house.

Credit History

Because your past credit history will play a large role in determining your interest rates, it will
also impact the affordability of a house. For instance, a buyer who pays six percent interest will
save a considerable amount of money over a buyer who pays eight percent interest on their
home loan. It may not seem like much now but, when averaged over time, the savings could be

Down Payment Amount
Believe it or not, the amount of your down payment will not only show the lender how serious
you are about buying a home, but it will also affect your ability to afford a particular house. For
instance, if you were to qualify for a home loan of $200,000, but your dream home was
currently listed for $250,000, a down payment in the amount of $50,000 would get you into the

The above scenario is just an example, but it does show how a down payment can affect the
price of the home that you are able to afford. Some lenders may only require a five percent
down payment, but you are free to pay as much above that as you wish. A larger down
payment can also reduce the principal loan amount, which thereby reduces the monthly
mortgage payments.

Calculating Your Monthly Mortgage Payments

One of the most important factors to consider when buying a new home is affordability. As a
general rule, mortgage payments should not exceed 25-30 percent of your monthly take-home
pay. The best way to know what you can afford is to determine the possible payment range by
comparing the price of the home with other essential ingredients.

Figure Out How Much You Want To Borrow

Your first step to calculating your monthly mortgage payment is knowing how much you want to
borrow. This can be determined by subtracting your down payment amount from the purchase
price of the home, which will give you the amount that you will need to request from a lender.

Know Your Rates

The next step is to determine the current interest rates for the purchase of a home. Rates vary
and may change often, so check with your lender for current rates. It's worth noting that the
interest rates you receive will, in part, be based on your credit history. This means that knowing
your FICO score and credit rating will give you a good idea as to how your interest rates will be

Choose Your Loan Term

Your monthly mortgage payments will be determined by a number of factors, including the term
of your loan. If you were to borrow $250,000, your monthly payments would be less with a 30-
year mortgage than with a 15-year mortgage. The reason is because it would take larger
monthly payments to get the loan paid off quicker, which is why you will need to select a loan
term before calculating your payments.

Additional Costs To Consider

Your total mortgage payment will include taxes, homeowner's insurance and possibly even
private mortgage insurance (PMI) if you provide less than 20 percent down and your loan
requires it.

Just The Facts & Figures

Now that you know how much you need to borrow, have chosen your loan term and are familiar
with the current interest rates, it's time to calculate your payment. Most lenders offer a
mortgage calculator on their Web site or you can get an estimate by speaking with your lender.
If you still need help in calculating your potential monthly mortgage payments, don't hesitate to
ask your REALTOR®, mortgage broker or lender.

Shopping For The Best Home Loan

Finding the perfect home is a task, but shopping for the best home loan can be even more
tedious. With so many lenders promising low rates, closing costs and little or no down payment
requirements, it's often difficult to know which way to turn. Luckily, there are several steps that
you can take to find the right lender for your individual needs.

Assess Your Situation

Do you know what your credit score is? If not, you should. Most lenders rely on this triple digit
number to determine both your creditworthiness and interest rates. If you have excellent credit,
you can probably work with almost any lender. If you have severe blemishes in your financial
past, however, finding the right lender may require a little more footwork.

How much money do you have for a down payment? If you are on a budget, you will need to
choose a lender that can help to get you into a home with a minimal down payment. Knowing
where you stand will give you a good idea as to which lender you need to work with.

Compare Rates

As is the case with anything in life, it pays to shop wisely. Because a home is the largest
investment that most people will ever make, it stands to reason that comparison shopping is a
must. As you speak with various lenders, ask about their rates, loan terms, qualification process
and down payment requirements.

Interest rates change often, which means locking in your rates when they are low can save you
a bundle of money. Because there are so many lenders competing for your business, you will be
greeted with plenty of appealing offers, including low rates, closing costs and down payment

Demand The Best

You are the one buying the home, so you should be the one to choose the length of your loan
term. With the exception of a situation where payments are simply unaffordable, it's up to you
to decide how long you want to pay for a house. Many homebuyers prefer a longer loan term to
keep the payments low, while others want to get the home paid for as quickly as possible with a
shorter term. It's important to keep in mind that the longer you pay for a home, the more
money you will end up spending in interest.

It's a good idea to talk to your lender about their willingness to accommodate your needs. If
you're in doubt about which lender to choose or are new to the area and need a little guidance,
ask your REALTOR® for a referral. He/she knows the business and will be more than happy to
assist you in making your dream of home ownership become a reality.
Recognizing Predatory Mortgage Lenders

A predator is defined as one that preys on others, which is why some lenders have fittingly
earned the title as predatory mortgage lenders. Excessively high interest rates, questionable
and/or hidden fees and high pressure tactics used to direct borrowers to a larger loan than they
may be able to afford are trademark characteristics of a predatory mortgage lender.

Prey Verses Predator

When it comes to obtaining a mortgage, the rules of the jungle often apply. If you aren't
careful, you may find yourself in the grasp of a questionable foe. If you are someone who has
had past credit problems or simply find yourself struggling to obtain a mortgage, it may seem
like a good idea to sign on with any lender who can close the deal.

But wait, jungle etiquette suggests that you should be knowledgeable of your surroundings and
always look before you leap. Before making a quick decision on a loan that nobody else would
approve, ask yourself whether or not the deal is a good one for you.

Measuring Up

If you suspect that you have been subjected to a predatory mortgage lender, look at how they
measure up to other lenders. Were you charged fees up front and, if so, how much were they
and what were they for? Do the lender's interest rates compare to current market rates or do
they exceed them? When reading the fine print, do you notice fees that were never mentioned
before but have now suddenly appeared in the paperwork? An honest lender has nothing to hide
and will not surprise you with unexpected costs.

Who's At Risk

To put it simply, anyone is at risk for dealing with a predatory mortgage lender. This likelihood
increases, however, if the homebuyer lacks the proper knowledge in how to identify an
unscrupulous lender who preys on the misfortune of others.

Individuals who are especially vulnerable include those that have been turned down by other
lenders and have little or no hope of obtaining a conventional loan. This may include individuals
with severe past credit problems, accounts in collections, first-time homebuyers with little or no
credit history and the elderly who have difficulty understanding the loan process or reading the
fine print.

When it comes to obtaining a home loan, the process can be both exciting and confusing. There
is a lot of paperwork to be signed, details to be worked out and numbers to be crunched. Your
REALTOR® can help to steer you toward a lender that will help you to get the best value for
your dollar.

Things You Need When Applying For A Home Loan

Congratulations! Now that you have found the perfect home, all that's left is getting the perfect
mortgage. In order to do that, you will have to know what your lender needs from you in order
to get your loan application approved.
Property Description

When applying for a home loan, you will need to provide the lender with detailed information
regarding the property that you intend to purchase, including a physical address, what type of
loan you are requesting and how you obtained the funds to be used as a down payment.

Borrower & Co-Borrower Information

All persons named on a home loan must be able to provide their name, date of birth, current
address, former address (if within the last two years), marital status, current and former
employment information, telephone number and social security number.

Most lenders require tax returns for the two years preceding the loan application, along with
current paystubs or, if self-employed, a year-to-date profit/loss statement.

Current Mortgage Expenses

An important part of every home loan is affordability, which is why your lender will need to know
how much of your income is available to pay for a new home. If you have a current mortgage,
be ready to provide a detailed list of expenses that you pay each month in relation to the
property. This includes a mortgage payment, real estate taxes, mortgage insurance,
homeowner's association dues, utilities, etc. If you plan to sell the home, let your lender know
so that they will understand you are simply replacing one debt with another.

Yes Or No

Almost every loan application asks both the borrower and co-borrower (if applicable) to answer a
few simple yes and no questions on the application. Questions pertaining to outstanding
judgments, bankruptcy filings, foreclosures, lawsuits, alimony, child support and citizenship
status are standard and should be expected when applying for a home loan.

Statement Of Assets & Liabilities

When applying for a home loan, both the borrower and co-borrower will be required to disclose
all of their current assets and liabilities. An asset is property, either real or personal, that is
owned and is of value. A liability, on the other hand, is a financial obligation for which one is

A loan application will request information relating to assets and their current market value,
including automobiles, real estate, stocks, bonds, life insurance (cash value), business net
worth, personal property, etc. If any amount of money is owed on these properties, the lender
will request information relating to the unpaid balance in order to determine the actual equity
that the borrower has in any given property.

How To Buy A Home With A Low Down Payment

Purchasing a home with a low down payment is important for a number of reasons, including the
buyer's ability to have extra cash left over for closing costs, decorating expenses, upgrades
and/or other essentials needed to turn their new house into a home. Thanks to the level of
competition between mortgage lenders, it's now easier than ever to buy a home with a low down
First-Time Homebuyers

There are a lot of perks to being a first-time homebuyer, including the ability to get in the door
with a low down payment. Many lenders will ask for a down payment as low as five percent
(three percent for FHA loans) to those looking to purchase their first home.

A first-time homebuyer is someone who has rented their previous home(s) or has never
purchased a house on a permanent foundation. Individuals who have owned manufactured
homes may also be eligible for a first-time homebuyer loan, but the final decision is up to each
individual lender.

FHA Loan

This type of loan is guaranteed by the Federal Housing Authority (FHA) and allows for a smaller
down payment than many conventional loans. In addition to offering down payments as low as
three percent of the total purchase price, FHA loans often carry lower interest rates and are
easier to qualify for. This type of loan is ideal for first-time homebuyers, individuals with past
credit problems or even those who wish to purchase a second home.

Provide Your Land As Collateral

If you own the land that you intend to build on, many lenders will use the land in place of a
down payment. In other words, you build a house on the land that you already own, and the
lender gets both if you default. This is why individuals who own land often choose to build, while
using the lot in place of a big down payment. In addition, many lenders are more willing to
approve a loan if the land is already owned by the buyer.

Owner Financing

When a seller lists their home, they have the option of considering owner financing. In this
situation, a buyer provides a down payment to the seller and signs an agreement to pay for the
home (plus interest) over a preset number of years. Owner financing typically requires a lower
down payment, which can be any amount that the buyer and seller agree to. Because there is
no bank qualifying and no credit check, a seller can extend the offer on any terms that they
wish. Remember this option is limited as most owners simply aren’t in the position to offer this
type of financing option, in order to do so, they must own their property outright with no
mortgage and not need the money immediately.

Buying A Home With Past Credit Problems

Buying a home can be both exciting and stressful but, for those with past credit problems, the
process may also seem intimidating. The good news is that many lenders have adapted to the
idea that many hopeful homeowners simply need a second chance, which means that past credit
problems no longer have to define your future.

Credit Blemishes

When life unexpectedly takes a turn for the worst, it's not always possible to come out without a
few bumps and bruises. Every day, people are faced with late or missed credit card payments,
mortgage foreclosures, bankruptcy proceedings, auto repossessions and even civil judgments
that will affect their credit reports for years to come. Whether it's from a job loss, injury or just
a simple case of temporary hardship, credit blemishes are often a part of life. The good news is
that they no longer have to prevent you from becoming a homeowner.

Give Yourself A Little Credit

After experiencing a credit problem, most lenders will want to see an attempt to rebuild your
credit through a steady payment history with a new account. This can be accomplished by
applying for a credit card and maintaining a responsible use of the account. If you aren't
approved for an unsecured card, you can always apply for a secured credit card. Either will
rebuild your credit over time and will help to show lenders that your past credit problems are
just that - in the past.

Clean Up Your Credit Report

Before applying for a home loan, make sure that you check your credit report from each of the
three major credit reporting agencies. Every 12 months, consumers can request a free copy of
their credit report from Experian, Equifax and TransUnion. If anything is incorrect or found to be
inaccurate, filing a dispute with the credit reporting agency can help to get the information
corrected before speaking with a lender.

When you apply for a home loan, the lender will access your credit report for the purpose of
determining your creditworthiness. In an effort to ensure that you have the best possible
chance at being approved for the loan at the best possible interest rates, making sure that your
credit report is accurate is a must.

Save Up For A Down Payment

Some homebuyers often qualify for a mortgage with down payments as low as five percent
(three percent for FHA loans), but those with past credit problems may be required to shell out
up to 35 percent or more for a down payment on their new home. A buyer who pays a larger
down payment obviously has more vested interest in the home and may, thereby, be less likely
to default on a loan. If you have past credit problems, check with your lender about specific
down payment requirements and start saving!

Creative Financing Options

If you've exhausted all of your conventional efforts and are still turning up empty, don't give up
just yet. Alternative financing is an option that many homebuyers use to purchase a home.
Your REALTOR® can provide you with details regarding any lease purchase and/or owner
financing properties, which may require no credit check, no bank qualifying, a low down
payment and competitive interest rate options.

Understanding The Closing Process

Once your loan is approved, you will be ready to take the final step that will lead to the door of
your new home. Many homebuyers are intimidated by the closing process, but it's not as
complicated as you may think. In fact, finding the right home is much more difficult than closing
the deal.

Making It Official

The closing process begins with the borrower and lender meeting in the presence of a notary
public. This is a person who is authorized to oversee, create or certify contracts, deeds and
other legal documents. At the conclusion of the signing, the notary public will provide their
stamp and signature, which certifies the identification of everyone present and the signatures on
the loan application.

Handing Over The Cash

When you meet      with the lender to close the loan, you will be required to produce your down
payment and, if    required, the closing costs. Ask your lender about acceptable payment
methods, which     may include a cashier's check or other certified funds. If you have an account
with the lender,   a personal check may be accepted in some circumstances.

Review The Loan Documents

At closing, this will be your final opportunity to review the loan documents. You should make
sure that everything is accurate and as promised, including the interest rates and loan term. It's
also important that you confirm that the names and addresses are correct, along with other
important information relating to the loan. If anything is inaccurate, now is the time to make
changes. Never sign the loan documents until everything is perfect.

Sign Here, Please

Once everything is verified and the loan documents are approved by both you and the lender,
it's time to sign on the dotted line. Believe it or not, this is one of the most nervous times for a
homebuyer. If you've chosen the right home and are comfortable with your loan, however, it
can also be one of the most exciting. Once the documents are signed, the notary public will affix
his/her stamp and signature.

It's A Done Deal

The final step in the closing process is a simple handshake. Most lenders and homebuyers will
extend their hands and, with a smile, the person who was just a homebuyer is now a
homeowner. Now that's something to shake on! With the keys to your abode now firmly in
hand, it's time to get moving and turn your new house into a home.

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