Don't start house hunting until you seriously consider how much you can afford to pay. A little advance planning will save you time and money later, because you won't bid on unattainable Property or apply for loans that are out of your ballpark.
When reviewing loan applications and making financing decisions, lenders typically request that the credit bureaus reporting your file -- Equifax, Experian, or TransUnion -- provide your credit risk score (also known as your FICO score). This seemingly mysterious number represents a statistical summary of the information in your credit report, including things like your history of paying bills on time and the level of your outstanding debts.
The higher your credit score, the easier it will be to get a loan. If you routinely pay your bills late, expect a lower score, in which case a lender may either reject your loan application or insist on a very large down payment or high interest rate (to lower its risk).
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1) How long will the approval process take?
2) Is this the lowest interest rate I can get based on my income, credit & assets?
3) If I decide to lock in a rate, how long do I have before it expires, is there a charge?
4) How are rate adjustments calculated?
5) How is the interest rate calculated on my loan?
6) What is the best term (yrs) of loan for my situation?
7) What will my monthly payment be?
8) Is there a prepayment penalty clause in my loan?
9) Please explain the balloon payment and how it works?
10) What is the Annual Percentage Rate (including points & fees)?
11) If I decided to go with a variable rate what will my payments be if my rate goes up by 3%?
12) How long will the initial rate be in effect?
13) Is there a cap on my interest rate or payment when it adjusts?
14) If I decided to convert to a fixed-rate Mtg. what would my expenses be?
Conventional Mtg. Most common mortgages. The borrower’s equity in the property, which is the difference between the value of the property & its liabilities, provide sufficient security for the lender to make the loan.
Fixed Rate Mtg. Carries the same rate of interest for the entire term of the loan.
Adjustable Rate Mtg. The rate floats based on the fluctuation of a standard index. The lender designates an index & then adds a margin (measure of profit) above the index. It has rate caps (ceilings) which limit the annual & life adjustments of the loan.
Loan to Value Ratio. The % of loan the purchaser obtains the value of the property.
Income Ratio. The Borrower’s ability to meet home ownership responsibilities by calculating his/her monthly expense to income & his/her total obligation to income.
Home Equity Loan. A long against the equity in a home. It can be a 1st mtg., if the property is free & clear or a 2nd mtg. if there is an existing 1st mtg.
Private Mtg. Insurance. (P.M.I.) A form of insurance coverage required when the borrower makes a down payment less than 20% of the purchase price.
Prepayment Penalty. A financial charge imposed on a borrower imposed for paying a Mtg. prior to expiration of the full mtg. term.
Discount points. A charge lenders may make when making loans 1% of the loan, payable at closing. Borrower can pay points to buy down the loan rate when the loan is made.
Loans for Cooperative Apt. Purchase. Lenders will make loans depending on the # of presale of the apartments, # of owner occupied apartments, cooperative corporation financials & the pro rata share of the building Mtg.Balloon Mtg. The balloon mtg. provides for installment payments that are not enough to pay off the principal & interest over the term of the mtg., so the final payment (termed a balloon payment) is substantially larger than any previous payment & satisfies the remaining principal & interest. If the balloon payment is a substantial amount of money, the note may provide for refinancing by the lender to provide the funds to the borrower if he cannot otherwise make the final payment.
There's a huge advantage to having a mortgage: Having income tax deductions!
If a family of 4 earning $100,000 a year purchases a 1/2 million $ house, it can save approx. $6,000 on taxes by getting a mortgage for 80% of the purchase price of the home, if that $400,000 borrowed from the bank at 6% interest were invested in a mutual fund earning perhaps 10%.