How to Understand Mortgage Lending

By Dlaniger, eHow Member Rating

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We’ve all heard about how mortgage companies and banks have taken advantage of uninformed consumers when it comes to buying or refinancing a home. There are ways to ensure that you are informed about the mortgage lending process and in control of the process as well.

Difficulty: Moderate

Instructions

Step 1

Know that when you purchase a home, you will need a mortgage loan if you don’t pay the entire cost in full. The purpose of a mortgage loan is to allow you to obtain an affordable loan to pay for the home so that you can move in and live in the home right away. Always obtain at least two quotes for your mortgage loan.
Step 2

Request a Good Faith Estimate before you decide you will take the loan. The Good Faith Estimate is a detailed account of the lender’s charges (discount fees, origination fees, processing fees, administration fee) and third party charges (appraisal fee, title fee, flood certificate fee). Make sure you hold your Loan Officer to these charges when you close your loan.
Step 3

Continue to pay your existing loan (if you have one) while your new loan is in process. Lenders will sometimes tell you not to pay your existing loan. If you go beyond 30 days and your loan isn't paid and also your new loan doesn't close, your credit will take a devastating hit.
Step 4

Know your credit score. Your credit score should be 620 or higher to qualify for a standard prime loan. If you score is below 620, you may have to obtain what is called a sub prime loan. The interest rate is higher and there are more costs associated with these loans.
Step 5

Consider your debt to income ratio (the amount of your monthly payout for your obligations compared to the gross amount of your income). Most loan programs will not allow for a debt to income to ratio to be higher than 50%.
Step 6

Be aware of your time on the job. You will have to verify that you have been working for the past two years and provide proof such as pay stubs, W2s and tax returns. There are exceptions if you have just graduated from college and have a contract for employment. If you are self employed, you must have owned your business for at least two years.
Step 7

Know the appraisal. A lender will look at whether a property has the value which will support the loan as well as other issues related to the property such as its safety and it must be livable.
Step 8

Go to a title company and close the loan. One of the most important documents you’ll see in the closing is the Truth in Lending Document. Don’t let it scare you. It may say the loan amount is $300,000 and the total of the payments over the life of the loan is $1,000,000.
Step 9

Look for on the Truth in Lending document is the APR (Annual Percentage Rate). The APR is different than your loan interest rate. Your loan interest rate is the rate you’ll pay on the money you borrow. The APR is the actual rate you pay when you add the costs of the loan and the actual loan amount. If one company has an interest rate of 6.25% and an APR of 6.75 and another company has an interest rate of 6.25% and an APR of 6.99, the latter company will typically have higher costs, so go with the lowest APR.

Comments

530shasta said

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on 1/28/2009 Very detailed info. 5* Most of the time lenders will want your income to be 2/3 more that your estimated monthly mortgage payment- just to be safe. Example, if your payment were $900, you would need an additional $1800 of income per month.