Mortgages and Equity Loans
One of the first challenges home buyers face is financing their home purchase. A home is the most expensive purchase most people make, and funding those purchases raises several legal issues. Below, you will find information about home loan options, qualifying for a mortgage, borrowers' rights, fair lending, and other related matters. You will also find information about how to borrow against equity in your home through structures such as home equity loans and reverse mortgages, which are legally similar to mortgages. The articles and resources in this section will help you prepare for the mortgage application process.
How to Determine What You Can Afford
The vast majority of home buyers don't pay all at once, but take out a mortgage loan and make monthly payments for up to 30 years. Your options are determined largely by what kind of loan you can get, how much cash you have for a downpayment, and how much of a monthly loan payment you can afford. Prospective homeowners also have to factor in the costs of home ownership, including maintenance, property taxes, and emergencies.
Generally speaking, you don't want to pay more than 1/3 of your monthly income on mortgage payments. In fact, lending institutions often will not grant a loan if the monthly payment will be more than 25 percent of the borrower's income, since there is a much higher risk of default. From a practical standpoint, you need to be able to get through periods of economic hardship without losing your home.
Getting Preapproved for a Mortgage
Perhaps the most important piece of information used by lenders to determine your creditworthiness is your FICO credit score, which is provided by Equifax, Experian, and TransUnion. Generally, those with a higher credit score are most likely to get larger loans with lower rates. Make sure you check your credit score and correct any errors that may be present before you talk to a lender. Lenders also consider borrowers' monthly income, how long they have held their job, and where they would like to purchase.
After reviewing your information, the lender can then preapproved you for a loan. They will issue you a prequalification letter, which you can show to the seller (or the seller's agent) when making an offer. The letter is not a guarantee, legally speaking, but can serve as a guideline. The next step is to get preapproved, which means the lender has done its due diligence and has guaranteed the loan.
Understanding the Different Types of Mortgages
Not all mortgages are created equal, and it's important that you understand exactly how they differ before signing on the dotted line. The two main types of home loans are fixed rate and adjustable rate mortgages. Fixed rate loans are more stable, as the rate stays the same throughout the entire life of the loan -- this means you pay the exact same amount in monthly home payments until the loan is paid off.
As the name implies, an adjustable rate mortgage (ARM) is subject to fluctuations in rates. One on hand, ARMs are more accessible to borrowers and allow more people to to experience home ownership. But they also can be unreliable. Since the rate is tied to the prime rate, it can either go up or down, which makes it kind of a gamble for many homebuyers. Some lenders offer enticingly low ARM rates to lure borrowers, but these rates typically go up quite a bit as the rates change.
If you are in the market for a new home, you will mostly likely need to apply for a mortgage. Learning about the process before walking into a loan office can help you make the right choices.