Things to consider when choosing a mortgage
By Danny A. Harrington
Sunday, March 11, 2018
Many years ago, if you wanted to buy a home and needed to borrow money for the purchase, you would go to your bank or savings and loan association and speak to the local loan officer.
The loan officer there already knew you, as well as your parents, grandparents and where you worked. After a few words, a promise and a handshake, you would get your mortgage.
It is not that simple today. The mortgage loan application process has become quite complex and can take several weeks or longer. The mortgage company does not typically intend to keep the mortgage loan that is made to you. They will most likely sell it to an investor. That is why the loan officers are often called mortgage brokers.
The process of approving your loan begins with your application. There are many factors that will be considered before your loan is approved.
The first one is your credit-worthiness. The lender will check your credit rating through the three major credit rating companies. Your credit rating determines whether you can proceed and also may affect the interest rate you receive. Secondly, the lender will determine your ability to repay the loan. This entails determining your monthly income and its stability. Your lender will need to verify your income through your employer and see your past tax returns.
The interest rate on your loan will be determined primarily by current market rates. Your payment will also be affected by the term of your loan. Today, mortgage loans typically are termed for fifteen, twenty or thirty years. In addition, the lender most likely will require that you pay your homeowners insurance and property taxes monthly through an escrow account.
The lender also will have your new home appraised to determine the value of it as collateral. The amount of a conventional mortgage loan cannot be greater than eighty percent of the value of the home. Therefore, at least twenty percent of the value of the home must be paid as a down payment.
If you do not have enough money for a down payment, there may be options available to assist you. The lender may offer you private mortgage insurance to provide coverage for any losses that they incur in the event of foreclosure.The insurance premium is usually just added as a monthly charge to your mortgage payment or may be paid through a higher interest rate on your loan.
There are other options too. The Federal Home Loan Administration (FHA) offers mortgage insurance for owner-occupied homes. A loan insured by the FHA can be as much as ninety-seven percent of the value of the home. Also, the Veteran’s Administration offers to insure mortgages to military veterans for loans up to one hundred percent of the value of the home. If the veteran is disabled, the fee for the insurance may be waived.
Occasionally, state and local governments create programs to provide down payment assistance for first time home buyers. Finally, some local credit unions will make mortgage loans up to one hundred percent of the value of the home for its members.
As in all other matters in our lives, the internet has changed the way we do business. You can go online, find a mortgage company and apply for your loan. In some cases, you can complete your transaction sitting at home in front of your computer.
But don’t forget your local mortgage company. The process of applying for a loan can be lengthy and frustrating. Having an actual person in front you that can address questions and guide you through the process may make the difference between a successful transaction and a nightmare.
Danny A. Harrington is an attorney at law and teaching Instructor at the ECU Department of Finance.