The Basics of Home Loans

Mortgage 101
Here's the inside scoop on home loans. From understanding down payments to finding the right lender, this quick guide will make you a pro in no time.
Published on
July 16, 2024
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What is a home loan?

A  home loan is a loan that's secured by property you own. The bank lends you money, and in return it owns the house until you've paid off the mortgage.

You might think of a mortgage as buying an asset—your home—with financing. While taking out a loan to buy something is fairly common, most people aren't familiar with how mortgages work or what they look like. To start thinking about what kind of mortgage may be right for you and your needs, let's break down some basics:

  • Interest rates vary based on factors including credit score and down payment amount; generally speaking, the longer-term (30 year) loans have higher monthly payments but lower interest rates than shorter-term (15 year) loans
  • A down payment is usually calculated as part of your total house cost; it's typically required before lenders agree to provide financing.
Home Loan application process
  • Once you've gathered all the necessary information and selected a lender, it's time to apply for your loan. The application process is typically a simple one-step process in which you provide the requested information to the lender and confirm that everything is accurate.
  • If you've made it through this step, congratulations! You're now ready for loan processing, underwriting, and closing—the three steps required before your loan gets approved (or rejected).
  • The entire mortgage application process can take anywhere from several days up to several weeks depending on how quickly you can gather documents from third parties like employers or landlords (if applicable), as well as whether or not any issues arise during underwriting. It's also important to note that while some lenders offer online applications, they may still require in-person meetings at their office before issuing preapproval letters or sending out final approvals.
What's included in a mortgage payment?
  • Principal is the amount you borrowed from your lender.
  • Interest is the cost of using someone else's money.
  • Taxes are a percentage of the principal, usually about 1% to 3%. These include property taxes, which usually go toward paying for roads and other public services in your area; hazard insurance premiums (or mortgage insurance), which protect lenders against losses resulting from damage to the property; and escrow payments for items like shared sewer and water service charges or homeowner's association fees (more on these later).
  • Insurance includes homeowners' coverage against loss due to fire or other perils; flood insurance if required by law in certain areas where flooding is common (and could result in substantial loss); title insurance premiums; private mortgage insurance premiums—more commonly known as PMI—which protect lenders against losses resulting from borrowers who default on their loans before they're paid off; earthquake coverage in some parts of California and other Western states where earthquakes are common; windstorm/hurricane protection offered through most private carriers underwritten by national underwriters that can afford such risks because they're spread across many thousands of owners rather than falling squarely on any one individual policyholder's shoulders alone
How does my income affect what I can get approved for?

The lender will also want to see your income on a W-2 form. Income is one of the biggest factors that determines how much you can afford. The higher your income, the more likely it is that you'll be able to buy a house and have enough money left over for all those other expenses.

But there's another side to this equation: how much do you pay in taxes? If you're in a high tax bracket and make $200,000 per year, but keep only $115,000 after taxes (which would be typical), then while your salary might seem high—you'd need to earn more than $300,000 per year just to cover mortgage payments alone—it actually isn't as much as it seems because so much of that money goes right back into Uncle Sam's pockets. In fact if we assume an average tax rate (15%) on this amount ($37k) then our borrower would really only have about $150k left at their disposal for housing expenses which means they may not qualify for certain loans due to their inability or unwillingness to put down enough cash upfront!

What is the minimum credit score for a home loan?

A credit score is a number that represents your ability to repay debts. A higher score means that you are a safer bet for lenders, and thus you'll be more likely to get approved for loans, including mortgages.

FICO scores range from 300-850 and are calculated by Fair Isaac Corporation (which was founded in 1956). FICO scores are used by many mortgage lenders when deciding whether or not to give you credit. It’s important to note that each lender has their own criteria for what constitutes “good enough” credit. In general, the higher your FICO score, the lower your interest rate will be on a loan like a mortgage or car loan.

Minimum requirements vary depending on which lender you go through; some require 620+ while others may only look at 600+. It’s wise to have at least one inquiry per year though—that way you can keep track of any changes made by lenders and remain in good standing with them regardless of what happens down the road.

How much home loan can I afford?

To determine how much home loan you can afford, there are several factors to consider.

  • Your income and expenses. What is the maximum amount of money that you can afford to pay each month? How much of your monthly income will go toward paying debt such as student loans, credit cards, car payments and other bills? If you have no debt but have a high income (more than $100k), that may affect things too.
  • How much money do you have in savings? The more money in savings, the better chance at getting approved for a loan since banks like to see that borrowers have enough assets to cover their monthly payments if they lose their job or become disabled.
How can I increase my chances of getting approved for a home loan?

If you want to increase the chances of getting approved for a mortgage, there are some things you can do. First, be honest when answering the questions on your application. Don't apply for any new credit cards; this could make it look like you're pre-loading debt onto your loan. Don't change jobs or close any existing credit cards, as this could affect your ability to get approved if they didn't know about these changes before applying for a mortgage. Also, don't make any large purchases or deposits (such as putting down money on a car), because that affects how much debt you have in relation to income and assets (which lenders will use when determining whether or not they'll approve the loan). Finally, avoid making late payments by paying all bills on time—this includes paying rent on time as well!

You can afford more than you think, but it's good to know what to expect.

You may be surprised at how much you can afford. But it's important to understand what you're getting into before you try to buy a house. There are many ways to get approved for a mortgage, and understanding your situation is the first step.

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