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Monday, March 7, 2011

Guide to home loans

Home loans come in many sizes, shapes and forms. There are home loans sponsored by various homeowner development programs, second mortgages, home equity loans, 30 year mortgages 30 year with 15 year balloon payment home loans and so on. A useful way to sort through the mortgage origination nexus is to have a plan. The information that follows serves as a guide to help get you started through the world of home loans.


Affordability


Before even researching a home a good starting point is determining how much you can actually afford each month, and not how much you think you can afford. The formula used by some home lenders is approximately 29 percent of your gross income. For example, if you earn $30,000 pre tax, 29 percent of that is $8,700 which means the maximum amount of home loan you may be approved for is $725 per month. 

Loans


Different lenders offer varying terms for similar mortgages
Credit score affects mortgage rates
After deciding how much home loan you can afford a good next step is to research the different loans available. This way, when you start looking for lenders, you might have a better idea about what they're trying to sell you. 

As mentioned previously, there are many types of home loans and these loans are designed by purpose, cost and time line. For example, an individual who wants to do some restoration work on an existing home may be interested in a specific type of loan called a FHA 203k Rehab loan.

Lenders


Another step in obtaining a home loan is finding the right lender. Some lenders work with federally chartered mortgage dealers such as Fannie Mae and Freddie Mac to sell home loans sponsored by the Federal Housing Administration. Other lenders may be the home sellers themselves or private banks.  For households with limited incomes, non-profit loan programs sponsored by the Department of Housing and Urban Development (HUD) may also be an option. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) provide helpful tips on how to search for lenders.

Origination


The origination of a mortgage is the process of obtaining a home loan. This process can be lengthy and challenging. A good way to be prepared for this part of the home loan procedure is to have finances such as credit history, bills, assets and debt well documented and organized. If you have too much debt, or haven't budgeted probably, your home loan may be rejected despite meeting the minimum income requirements. Having a helpful and knowledgeable loan officer, and Realtor can be helpful but many more persons may be involved including accountants, appraisers, inspectors, title searcher, co-signers, and lawyers.

Costs


Costs are another important aspect of home loans. These costs can be quite high and are sometimes incorporated into the price of the loan. Typically a down-payment is required, along with private mortgage insurance (PMI) if the down-payment isn't 20 percent of the loan value or higher. A good faith estimate should be provided to you before signing for the home. Study the costs included in this estimate in addition to the terms of agreement. Some mortgage contracts may contain caveats such as pre-payment penalties, non-rental clauses, and loan recapture stipulations that may work against you financially in the future.

Sources:

1. http://bit.ly/8d6DPV (Federal Citizens Information Center)
2. http://bit.ly/eUweCM(Department of Housing and Urban Development)

Image source: CCO PD