A home loan is a guaranteed loan which uses real estate as to safeguard the indebtedness. Most folks do not have the amount of money to pay the entire cost for a house. Instead, they will use a down payment along with a loan to purchase a house. With time, the borrower will pay off the loan in affordable monthly payments. While the loan is in repayment, the lender will place a lien on the house to protect its security interest.
It is also possible to get a second home loan or home collateral credit line. With either of these products, they generally use a second place lien behind the first home loan. After the first lien is completely repaid, the remaining proceeds of the home may be used for the second lien. In the end lien holders have been satisfied, the homeowner gets the all the proceeds.
Qualification
To get a mortgage, almost all loan companies require that borrowers meet strict income and home collateral specifications before funding the loan. An important idea to understand is the financial debt to income (DTI) ratio. This is where all of the monthly minimum debt payments are divided by the monthly income. If the ratio is too high, the lender will not approve the loan.
Another primary qualification for getting a home loan is the loan to value (LTV). Today, no loan provider will make a loan that is more than the present evaluated value of the home. However, some loan companies may not go above 60% to 80% of the LTV. Often, second homes and investment properties will have a more stringent LTV ratio that is lower than a loan on the owner's principal residence.
Escrow Account
In many cases, the principal balance on the home loan isn't the only thing that's needed is to be paid each month. Many borrowers will also be required by the loan provider to fund an escrow account for home taxes and homeowners insurance premiums. The bank will pay the required taxes and insurance rather than the homeowner. There is a cushion amount above the real amount needed within the escrow account too.
The monthly loan payment includes one month's worth of the escrow account, which can add hundreds to the monthly home loan payments. Prospective borrowers should remember to include the escrow payment amount when calculating how much payment will cost.
Foreclosure
If the borrower doesn't make monthly mortgage payments, the lending company can start foreclosure proceedings. To prevent foreclosure, the borrower will need to make all scheduled payments as well as any additional interest and late fees. The further behind a homeowner is on making payments, the harder it is to get out of foreclosure.
Depending on the kind of loan and state laws, the lender might be able to go after the borrower's other assets if the foreclosure sale doesn't produce enough funds to pay off the loan. Also, a foreclosure is extremely damaging to a credit report. It is almost as serious as a bankruptcy. Borrowers should try to avoid foreclosure.
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