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Thursday, February 3, 2011

Mortgage financing 101

Mortgage financing is the lending of money with interest from a financial institution or other lender to a property buyer such as a home buyer. Mortgage financing can come from a variety of lenders with differing terms of contract, interest rates, down payments and settlement costs.

There are several types of loans one can obtain via mortgage financing and these loans can be obtained from private, public and government linked financial institutions. Additionally, a home buyer may obtain financing from a seller or online public sources of mortgage loans. This article will discuss the home financing process, and what to do in the case of re-applying for mortgage loans.

The video below is a good starting point to learn about mortgage financing:

Types of mortgage financing options

• Minimal income reporting mortgage loans (ALT-A)
• Home equity lines of credit (HELOC)
• Fixed rate mortgages
• Variable rate mortgages
• Interest only mortgage loans
• Adjustable rate mortgages (ARM)

The home mortgage financing process

Home mortgage financing often involves a lot of paperwork and requires a certain percentage of the home's value to be purchased with a down payment. This down payment can be as little as 2% and as high s 20% or more depending on the lenders requirements and the home buyers wishes.

Before obtaining financing a lender will pre-qualify the borrower through a general credit check with one or more credit reporting agencies. After pre-qualification, the home buyer may then seek pre-approval which generally requires more extensive investigation on behalf of the lender. This investigation assesses the borrowers financial strength in terms of income, asset value, outstanding debt, credit history, and possibly other factors such as household information, spousal information, criminal background, country of residence etc.

The pre-approval process can take a few weeks depending on the lenders efficiency, lending policy and availability of loan officers and accountants. Once one is pre-approved one may bid on a home with little worry of not having that bid financed so long as the bid falls within the range of approved funding. A number of lenders exist including online mortgage lenders, federally subsidized lenders, mortgage brokers, private banks and public banks. The type of lender one uses, market conditions, economic factors, and type of mortgage will likely have an affect on the cost of the loan and the monthly payments.

Several types of mortgage loans exists including interest only mortgages, fixed interest loans and adjustable rate loans. Each has unique advantages and disadvantages and should be researched thoroughly before choosing. Before researching which type of mortgage might be best, identifying one's goals and expectations can be helpful as some loans may not fall within those goals thereby facilitating the choice of which type of mortgage is most appropriate.

Additional methods of mortgage financing

In some cases the traditional means of obtaining a mortgage may not be useful or financially advantageous. In such cases creative mortgage financing may prove helpful. Creative mortgage financing is essentially any type of mortgage financing that does not conform to traditional means. For example, seller financing eliminates the need for a traditional mortgage loan and process altogether. In such cases, the seller of the home may offer favorable interest rates, a more flexible loan application process and a more personalized lending experience. What is more seller financing may overlook some factors that would be held against a borrower by a potentially more conservative lender.

Another type of creative mortgage financing may involve mortgage assumptions which are when a home owner or mortgage buyer sells the mortgage to another lender through a process called mortgage assumption. In such cases, new owners may be added to the mortgage or the mortgage may be assumed in its entirety by one or more new borrowers. The application procedure for such an assumption may be made less rigorous with multiple persons assuming the loan due to a potentially increased income leverage and capacity to take on the mortgage.

A third strategy one may try is to obtain a mortgage from an international lender in a foreign currency. If the value of currency declines or the value of one's own currency rises, one is effectively benefiting from changes in the exchange rate making the cost of the home potentially less than one may be able to obtain in conventional markets. Additionally, the lending requirements from an international lender may not be the same allowing the loan to be processed more easily.

Re-applying for mortgage financing

There are a number of reasons a mortgage application may be rejected. Usually the rejection has to do with the assessment of one's financial strength, lack of funds by the mortgage lender, or an unreasonable mortgage request. A few helpful steps a borrower may take in such instances are the following:

Inquire to the lender: Asking the lender why a mortgage application was rejected can help the borrower asses how to improve the application.

Build credit rating: Sometimes a poor or less than stellar credit rating can be a reason for a mortgage application rejection. Building credit by paying bills on time, obtaining a secured or unsecured credit card and then paying it regularly over time can build credit.

Increase down payment: An increased down payment will demonstrate a greater commitment on behalf of the buyer and lower the risk for the lender. Both of which should have a positive influence on a mortgage application.

Lower debt-to-income ratio: The debt to income ratio is one's total debt in proportion to one's income. The lower one's debt level in relation to one's income the greater lending potential a borrower may have.

Apply for a smaller amount: If the amount of the mortgage amount being requested is too high an applicant may not have the earnings capacity to make consistent payments. Lowering the mortgage amount to a value within affordability can assist in the application process.

The mortgage process is sometimes lengthy and can involve significant time, energy and preparation to complete. This does not mean obtaining a mortgage is impossible, rather it is quite the opposite. The information in this article can be of assistance in becoming familiar with mortgages and how to obtain them.

In any case, researching different types of mortgages and lenders is essential to knowing what is required and in acquiring an optimal loan. Additionally, understanding what to do if a mortgage application is denied can assist one in improving one's quest for mortgage financing. In sum, the more acclimatized one becomes with the mortgage process, the more manageable is should become.