How Do Home Loans Work?

Applying for a Home Loan

In order to obtain any home loan, you must first submit an application. This application will tell the lender the information needed to obtain verification that you can, in fact, pay back the loan. Along with the application you will sign an authorization form to give the lender the right to obtain your credit report. Many loan approvals are based on your credit rating, and those that are not still look at the report to see how you have been paying your bills, or your credit history. The application will include questions on your present employment and employment history, rental information and bills that you owe. These will include credit cards, car loans, furniture loans and any other loans you may have. One of the most important factors of the application is how much you owe versus how much you make. Certain loans have specific ratios that these numbers must fall into. One of the benefits of the loan application to the borrower is that if the mortgage representative does not feel that you can qualify for the mortgage program you were trying for, he can try to fit you into another program. There are many, many different programs for home loans today.

The Loan

The loan you use to purchase a home is called a first or primary mortgage. The house and property are the collateral for the loan This means if you don't make your payments, the lender has the right to foreclose on the property and take it back from you. It then resells it to get its money back. Once you are approved for a loan, the house must be approved. That means it will be appraised to make sure it is worth what you are paying for it. The appraiser may call for certain inspections to be done to verify the roof and that other systems are working properly. Many times she will ask that a wood-boring insect inspection be done to make sure there are no bugs or damage from them. Once the lender approves the house and the borrower, it will most likely require title insurance on the property. This is commonly done through a title insurance company, an abstract company or an attorney. At the closing of the loan, you will be required to bring a certified check for the amount of the closing costs and down payment. You will then sign the loan documents, of which two are a mortgage and a note. The mortgage states the terms of the loan, and the note is your personal promise to pay back the loan. These documents will then be recorded in the county records where the property exists.

Closing Costs

All lenders charge fees for getting a loan. You will receive a good faith estimate of closing costs from the lender, which should explain all the fees involved in obtaining the loan. Other closing costs may be a title insurance policy, attorney's fees, the use of a closing company and an appraisal. Property taxes will be prorated from the time of settlement until the tax bill is due, and sewer and water charges are done in the same manner. Some of the closing costs can be paid or shared with the seller of the property. Most closing cost are charged by the custom of the area or by whom the charge benefits. Many times charges for repairs are split between the buyer and the seller. Some mortgage programs allow the seller or a family member to pay a certain amount of the closing costs. It is a credit if the seller pays them, and it is known as a gift if a family member pays them. You should always ask the mortgage representative if this applies to the mortgage for which you are applying. Ask as many questions as you can possibly think of so there are no surprises at the settlement of your loan. The more knowledge you have the more confident you can be when buying your first home.