Tuesday, June 19, 2012

How Does a Mortgage Work

By Dale Devries

The three most commonly used mortgages are FHA, VA and conventional, each of which has variations. FHA stands for the Federal Housing Administration; they insure an approved lender for the loan if there is a default. They regulate approvals and down payment amounts and set standards for the property. They do not lend money or regulate interest rates. They collect an insurance payment from the lender, which is passed on to the borrower. The borrower pays an upfront mortgage insurance premium and then pays an annual premium broken down into monthly payments and included in the total monthly payment. They also set a limit on the purchase price for a property. Most FHA mortgages are assumable, but the new borrower must meet all qualifications. The FHA is authorized to insure a variety of programs, such as home improvement loans, condominiums and graduated payment and adjustable rate loans. Their main function, though, is to get borrowers into homes with small down payments.

Veterans Administration (VA) mortgages are available for veterans, surviving spouses and active-duty military, with certain qualifications. The VA does not directly lend the money either, but guarantees a certain portion of the loan. These mortgages can be used to purchase, refinance or construct a home. They can also be used on condominiums and manufactured homes. The VA does not set loan limits or regulate interest rates. You will have to pay a funding fee to the VA, and closing costs may be paid by the seller. The unique feature with a VA loan is that there is no required down payment. These loans are assumable, are for a maximum of 30 years and carry no prepayment penalties.

Conventional mortgage programs have evolved to the point that almost anyone can qualify. There are hundreds of programs, and most of them will depend on your credit score. With a high credit score, you can have no down payment to very little down payment and still get the best rate going. With not-so-great credit, there are still many options. With bad credit you may have to come up with a sizable down payment and pay a high interest rate, but there are programs out there for you. If you mortgage more that 80% of the sale price with a conventional mortgage, you will have to pay a private mortgage insurance premium. The most common length of time for a conventional mortgage is 15 or 30 years; however, they can be arranged from 10 to 40 years. Whereas an FHA loan requires full documentation of your application, some conventional loans don't, making them easier for self-employed people to get.

A word of caution: It is best not to use the online mortgage companies that tell you to fill out the application and four or more banks will present you with an offer. When they do this, each individual lender will run your credit, and those inquiries will have a negative effect on your credit score. If you want to shop around, get a copy of your credit report yourself and take it with you. Ask the lender, based on the credit report you have, what loan would be best for you. Start with your local bank that you deal with on a regular basis. Other places to try are savings and loans, credit unions and mortgage companies.

The application process is going to be about the same at all of them. You will need to bring three months' bank statements and your last three pay stubs, plus proof of residence (such as a lease or mortgage payment book) and account numbers for all of your outstanding loans. If you rent you will also need rent receipts. If you don't have those things with you, the loan officer will give you a list of documentation to bring or mail to him. He may ask for other documentation depending on your circumstances.

When asked about your debt or credit, do not lie. They will find out eventually, and you will just be wasting time and slowing down the process. A mortgage loan process can be done in as little as a week or take a couple of months, depending on the particular challenges of the loan.

During the application, the loan officer will give you a disclosure that will tell you what your monthly payment will be, usually including your property taxes and homeowners insurance. He will explain all the terms of the mortgage once the best mortgage for you is found.

After closing on your property you will normally start making your mortgage payment on the first of the month after you settle. Although obtaining a mortgage sounds complicated, there are very qualified professionals who will help you along the way and make the process much easier.


http://www.lenderva.com

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