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Mortgage finance 101

Updated on March 2, 2008

Home mortgage financing for most families is a big challenge. If you are a would-be home owner, this mortgage financing 101 will help you to meet the challenge. Mortgage is a loan secured by the collateral of certain specified real estate property that the borrower is obliged to pay back with predetermined set of payments

Under most circumstances financing mortgages are closely associated with loans that are secured on real estate rather than other property (such as ships). Financing mortgage is the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.

Normally, there is a down payment required for some percentage, ranging from 5% to 20%, of the mortgage loan, although, there are some mortgages available that do not require a down payment. One advantage of paying a larger down payment of 20% or more is that the debtor is often not required to carry mortgage insurance.

There are several types of mortgages available including fixed rate mortgages, balloon mortgages, and adjustable rate mortgages (ARM) for your home mortgage financing.

In a fixed rate mortgage the interest rate of the loan is fixed for the term of the loan which is usually 15 or 30 years. In an adjustable rate mortgage, or ARM, the rate can be changed as the prime rate or other standard rate changes. A balloon mortgage is one in which the rate is set for a given amount of time and then the entire loan is due at the end of that time. Typically balloon mortgages and ARMs have a lower rate than fixed rate mortgages, but carry additional risk. The mortgage lien is the lender's security interest and is recorded in title documents in public land records. The lien is removed when the debt is paid in full. A mortgage for home mortgage financing normally is a long-term debt, ranging from 25 to 30 years, but can be written for much shorter periods.

What type home mortgage you want or you are qualified depends on your current financial situation. Once you decide to apply for a mortgage loan, you should prepare every thing needed for the mortgage application. Mortgage application is an overwhelming process for most people. First of all, a pre-purchase evaluation by your chosen lender is needed. This can save you a lot of time spent looking at properties you cannot afford. Most lenders require that you spend no more than 28 percent of your gross monthly income on a mortgage payment or 36 percent on total debts. Ultimately, some other factors, such as gross income, the amount of cash you have available for the down payment, your credit history, current interest rates, closing costs and cash reserves required by the lender, and the type of mortgage you select, will also affect the price you can afford to pay for a home.

What to do if you don't meet the standards of conventional mortgage guidelines?

Reasons for a mortgage denial may include poor credit, recent bankruptcy, foreclosure, and self-employment. However, please don't be discouraged because there are several alternatives to conventional mortgage loans, called creative mortgage financing.

First of all, you can turn to government loans, FHA Loans, VA loans or RHS Loans, offered by lenders and guaranteed by the Federal Housing Administration (FHA), U.S. Dept. of Veterans Affairs (VA) or the Rural Housing Service (RHS) of the U.S. Dept. of Agriculture, respectively.

FHA loans

FHA-guaranteed loans are available in both urban and rural areas for single family homes, and multiple-units properties, and for condominiums. Interest rates on FHA loans are generally market rates. Required down payments can be as low as 3 percent and closing costs can be wrapped into the mortgage. To get a FHA-insured loan, you need to apply to a HUD-approved lender.

VA loans

VA loans allow veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000.

RHS loans

RHS loans allow rural residents to buy homes with minimal closing costs and no downpayment. Guaranteed Loan program is a RHS loan guaranteeing that should the individual borrower default on the loan, RHS will pay the private lender for the loan. The purpose of this loan program is to enable eligible low- and moderate-income rural residents to acquire modestly priced housing for their own use as a primary residence. The program is available for the purchase and repair of existing and newly constructed dwelling. Requirements for the loan in clued 1) no down payment, 2) ability to pay the mortgage, including taxes and insurance, 3) applicants has no adequate housing, 4) unable to obtain credit elsewhere, and 5)have acceptable credit histories. Loans are made for up to 30 years.

With direct Loan program, individuals or families receive financial assistance directly from the RHS in the form of a home loan at an affordable interest rate. These loans may be made to eligible applicants to buy, build, repair, renovate, or relocate homes, to provide related facilities, or to refinance home debts under certain conditions.

Applicants for direct loans must have very low (below 50 percent of the Area Median Income (AMI)) or low incomes (between 50 and 80 percent of AMI). Other requirememts for the loan are the same as those for guaranteed loan program.

Loans are typically made for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms)

In addition to government-guaranteed mortgage loans, there are private investors and lenders who are willingly to offer creative mortgages to those who are not ideal candidates for conventional mortgage loans. Consulting a well-experienced mortgage broker for advice and you can be as creative as you like in your mortgage financing.


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