All You Need to Know About Home Mortgage
All You Need to Know About Home Mortgage
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Home Page > Finance > Mortgage > All You Need to Know About Home Mortgage
All You Need to Know About Home Mortgage
Posted: Jul 07, 2011 |Comments: 0
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Understanding Home Mortgages
Understanding home mortgage loans is essential to home buyers everywhere. There are different types of mortgage loans available, with varying rates and terms, and the implications of each of these for the borrower are critical. Undertaking a mortgage is a complicated process, and advance consideration of its various aspects is well worthwhile. This article will seek to touch on some of the most important points in the process, and to aid a borrower in developing a good understanding of mortgage loans.
Credit considerations are paramount in mortgage lending, both to the lender, and to the borrower. To the lender, a borrower’s credit score will affect rate, terms, and even overall availability of mortgage financing. Credit history is viewed as the best predictor of future credit performance, and thus, where history is poor, a lender will likely see reason to question the viability of a loan. This is true, of course, of all loans, but most especially of mortgage loans, given their size and duration. Credit grades range from the very worst, through the adequately performing but not exemplary, and all the way up to the very best. A would-be borrower with very bad credit will probably not be able to get mortgage financing at all, while one with only marginal credit can probably find financing, although perhaps with undesirable terms. Needless to say, the Grade A borrower, the one with a perfect or near-perfect credit history, will receive preferential terms and handling. For other borrowers, however, those of modest credit or perhaps worse, where mortgage financing is available, the borrower must consider whether it is even worth having. Having a really bad loan may be the same or even worse than having no loan at all.
Credit score is not, however, the only qualification a mortgage lender will consider when reviewing a loan application. The lender will also consider a borrower’s income and debt in qualifying the borrower for financing. This assessment is numeric and nearly mathematical, where the lender evaluates a borrower’s debt-to-income ratio, or actually two debt-to-income ratios, being the “front-end” debt-to-income ratio and the “back-end” debt-to-income ratio. The front-end debt-to-income ratio is calculated as the mortgage payment divided by gross monthly income. Generally speaking, lenders will not accept a front-end ratio which exceeds thirty one percent; however there will often be flexibility in this measurement. It is, in fact, the back-end ratio that more often creates a roadblock for a borrower. The back-end ratio includes all debt owed by a borrower, including not just the mortgage payment which was included in the front-end ratio, but also credit card payments, car payments, student loan payments, and any other installment debt owed by the borrower. The limit to the back-end ratio is generally higher, approaching even forty five percent, but the calculation is also much more severe. In the end, these calculations will determine what size mortgage loan a borrower can afford and qualify for, and so, what size home the borrower can buy.
Mortgage loan types include the fixed rate mortgage, in which the interest rate and monthly payment remain the same throughout the life of the loan, and the adjustable rate mortgage (ARM), in which the rate will change during the term of the loan, and, of course, the monthly payment along with it. The rate and payment on an ARMs generally start with a fixed rate at the beginning of the loan, but with the rate become adjustable and probably increasing later on. Perhaps the best way to decide which loan type to take is to determine how long the loan will be kept. If only for a few short years, then likely the ARM will make sense. If the loan will be paid out to maturity, then more likely a fixed rate will be preferred.
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