A Quick Guide to Home Loans

Getting a home loan or a mortgage takes some work. However, once you get preapproved, you can hunt for a house with confidence as long as no big changes in your credit rating change. When you are preapproved, carefully review the proposed house payment to see if it will work with your budget.

What Is Included In My Mortgage Payment?
Your mortgage payment includes

the principal
the interest
private mortgage insurance, or PMI
the escrow payment
Mortgages are amortized, which means that when the lender is at the greatest risk, your payment is mostly interest. As the risk for the lender lessens, your payments will have a bigger impact on your principal balance.

PMI can be reduced or removed once you have paid down 20% of your mortgage principal. PMI will equal .5 to 1% of your total mortgage principal spread out over 12 months. If you end up getting a mortgage without a 20% down payment, consider adding a bit more to the principal each month so you can get rid of this fee.

What’s an Escrow Payment?
An escrow payment is fundamentally a savings account held by the bank on your behalf. Out of the escrow account, your bank will pay

property taxes
With an escrow account in place, your lender can be certain that your property taxes and homeowner’s insurance are paid in a timely fashion. Again, this surety protects your lender from risk; you must have homeowner’s insurance to get a mortgage and you may lose your property if you don’t pay the taxes.

House Vs. Condo Vs. Duplex
If you’re looking at condos and have qualified for a VA loan, make sure you buy from the VA approved condo list. Condos are considered to be an extra risk because your neighbors can have a huge impact on the value of your home.

While you can get a traditional mortgage for a condominium, do be aware that there are lenders who won’t work with people looking at condos. If you’re looking at duplexes, you will probably need to get a commercial mortgage.

Commercial mortgages place a bigger burden on the buyer than the property. An FHA or VA backed mortgage will place a bigger burden on the property and thus the seller. Your FHA lender will place requirements on the property to make sure that a first-time borrower can actually live in the home.

Funding For a Fixer-Upper
If you have the skills and find a fixer-upper, you may not be able to qualify for a traditional mortgage at the time of purchase. However, once you get it fixed up you may be able to get a traditional mortgage on the new value.

For first time homebuyers, a fixer-upper may not be the best choice. It’s easy to look at a bargain property and envision what it could be, but unless you have the skills to do a lot of the work yourself, you may quickly price yourself out of the market when you go to get your conventional mortgage.

Rent-To-Own Options
Depending on the state you live in, you may be able to get a private mortgage or buy your property from a landlord. For anyone with serious credit challenges, this type of mortgage may be the only way to buy a home.

However, these loan structures are quite specific. You will need to demonstrate a strong payment history. You may need to come up with a down payment, which you may lose if you choose not to buy the home. Additionally, you may be able to get a balloon financing setup from a private seller with an agreement to require you to get a mortgage after five years. However, if property values go up during those first five years, your mortgage principal may be higher than the buy would have been at the beginning of your five year purchase process.

Buying a home is a wonderful way to build wealth over time for your family. There are many ways out there to buy a home, but the better your credit is, the more options you will have.