If buying a home is on your horizon, it's important to know the basics of mortgages so that you can make well-informed decisions.

Mortgage Types
Fixed rate mortgages and adjustable rate mortgages (ARMs) are the two main types of mortgages. Fixed rate mortgages have a fixed rate and a monthly payment is required throughout the term of the mortgage. ARMs have a rate that fluctuates with market interest rates and a monthly payment is required throughout the term of the mortgage.

The type of mortgage that you choose will depend upon factors such as the amount of time you plan to occupy the home, the frequency and schedule of ARM changes, the current interest rate environment, and your ability to afford your monthly payment should interest rates rise.

Income and Debt
The most important item that lenders review before granting you a loan is your ability to meet your financial obligations, which reflect your income and amount of debt. To determine your ability to pay, lenders evaluate your housing ratio and total financial obligation ratio.

The housing ratio is the percentage of your gross monthly income that will be needed to pay for housing expenses after you buy your home. Lenders normally prefer a ratio of 28% or lower.

The total financial obligation ratio is the portion of your income that covers both your housing expenses and any other financial obligations like child support. Lenders normally prefer a ratio of 36% or lower. Both housing and total financial obligation ratios are often negotiable upward of the preferred ratio.

Credit History
Lenders also critique your credit history, reviewing your entire credit report, and paying close attention to your credit cards, automobile loans, and all other loans. They analyze whether your loan payments were on time or late, and verify if any of your creditors have discharged a debt because they believed that it would never be repaid, you declared bankruptcy, or your lender foreclosed on your home.

Down Payments
You will be in a better position if you're able to put down a larger down payment. A big down payment will provide you with a larger amount of equity and frequently translates into a better deal, but this is not always possible. Fortunately many lenders will finance as much as 97% of a home. Therefore you can put down less, but you will start off with little equity, and probably have to purchase mortgage insurance.

Points are the fees you are required to pay when you take out a mortgage; one point is equal to one percent of the principal amount of your mortgage. Points are usually collected at closing, and are paid by the borrower (you) or the home seller, or split between the two parties.

Closing can take about six to eight weeks from the time you apply for a mortgage until the home is yours. Before you close, inspect the house to ensure that it's in the condition you expect; some lenders will require a home inspector to assess the home's condition as a requirement of the mortgage.

Though the mortgage process includes many details, don't let it intimidate you. Through time, patience and effort, you can find the mortgage that's right for you.


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