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Home Loan FAQs

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Getting a home loan isn’t simple. The complexity of the process means that there are a lot of different things for you to consider. Out of this, many questions arise. The following are some of the most common questions, along with a brief answer for each. For more details on these subjects, please look at the rest of our Home Loan Guides.

What are the Advantages of Purchasing a Home?

Beyond just securing a place to call your own, purchasing a home can actually be a very good investment. Renting an apartment or condo is like paying for a service that stops when you stop paying. When you put money toward a home, though, you’re investing in a commodity that is yours to do with it as you please. If you raise the value of the place or there’s an upswing in the seller’s market, you could sell your home for a very good profit.

If you decide to stay in the home and pay off the mortgage, you can (eventually) say good-bye to monthly payments forever (something that will never happen if you continue to rent).

Owning a home can have great benefits for the very long term; imagine being able to leave your home to your children, making it so they don’t have to put up with a mortgage. Some places remain in a family’s possession for generations. These are just a few of the benefits of home ownership.

What are Prequalification and Preapproval?

Prequalification and preapproval are both processes in which you contact a lender to get an idea of how much money you will be eligible to borrow for a home loan. Prequalification is very informal and can usually be done with a phone call. The problem is that, while the estimate can certainly be accurate, it’s also very possible that it won’t be at all.

Preapproval requires much more paperwork, as it is a formal process. You’ll know exactly what you can get from a specific lender. That way, you can go find a house for that amount or less and be sure that you can get a loan. Some sellers may even require preapproval from you.

What are the Costs Attached to a Mortgage?

Unfortunately, a mortgage requires more than just a simple fee. It’s a legal process involving several parties, so things are a little more complicated. Here are some of the more common things you may end up paying for:
  • Underwriting charges
  • Processing charges
  • Origination fee
  • Appraisal fee
  • Credit report
  • Title insurance
  • Attorney fees
Some lenders will try to inflate these fees up front, so it’s a good idea to ask for a Good Faith Estimate (GFE), which will list out all the costs and charges. With this estimate in hand, you can take a closer look to make sure that everything is what it should be.

What is Involved in Applying for a Mortgage?

In addition to filling out the actual paperwork, you’ll have to gather some information. First, you’ll want to go through the process of preapproval (see above). Then, you’ll need to get your credit report analyzed and the property appraised. Finally, you will have to fill out several documents in regard to income, employment verification, assets, debts, and expenses. Your lender will consider all this information along with your application when deciding whether or not to approve you for a loan.

Are There Government-Supported Home Loans?

Yes. Departments like the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), and U.S. Department of Agriculture (USDA) actually guarantee loans to those who meet specific eligibility requirements. If you meet these requirements, you may be able to get a loan with relatively low interest rates or a smaller down payment.

What are Fixed-Rate and Adjustable-Rate Mortgages?

These are the two broad categories of available mortgage loans. With a fixed-rate loan, your interest rate will stay exactly the same throughout the entire length of the loan, unless you refinance or in some other way renegotiate the terms of the loan. With an adjustable-rate mortgage, the interest rate is adjusted periodically to bring it in line with market rates. Adjustable-rates are usually lower at first. This is an attempt to compensate for the risk that the rate may go up in the future.

What is the Difference Between Interest Rate and APR (Annual Percentage Rate)?

The interest rate is the annual interest you are charged over your principal amount. So, if the principal of the loan is $100,000 and the interest rate is 10%, your total interest paid for the year will be $10,000.

The annual percentage rate (APR) includes the interest rate as well as any other lender fees that are required to finance the loan. These fees could include pre-paid interest, closing fees, mortgage insurance, and others. Simply put, APR is the total cost of loan per year, not counting the actual principal of the loan.

What is a Credit Score?

Your credit score is a statistical analysis of your credit files. It represents your creditworthiness. Your credit score takes into account all of your past credit and can include almost anything (car loans, home loans, personal loans, and much more). Lenders use your credit score to help determine whether or not they will give you a loan. If you have a long credit history and have had no problems making payments, you shouldn’t have much trouble securing a favorable loan. On the other hand, you’ll have a little more trouble if you have a bad track record or no credit history.

What is Private Mortgage Insurance?

Private mortgage insurance (PMI) is often required by lenders if you want a loan but can’t afford a typical down payment (usually somewhere between 10% and 20% of the cost of the home).

Putting down a lower down payment (as little as 0-5% with a PMI) is risky for the lender, so they secure a PMI policy for you, for which you pay a fee along with your monthly loan payment. Say you make a 5% down payment at closing: If you were to default on the loan, the lender would receive (from the PMI company) the difference between an ideal down payment of 20% and what you actually put down, in this case, 15%.

PMI can be cancelled after you’ve paid off some of your home loan or if the value of your home goes up (see our guide on the subject for more details). PMI isn’t ideal, but it can make securing a home loan possible for low-income families.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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