Buying a home for the first time is a dream for many people. To make this dream come true, it is common for consumers to resort to mortgage loans. There are some types of loans available for those who do not have the financial conditions to buy a house paying the full amount in cash.
Mortgage loans offered by private sector lenders have no government incentives or benefits. In this way, it is possible to state that anyone who thinks that it is necessary to have 20% of the total value of the property to obtain a mortgage loan is mistaken. In fact, with just a 3% down payment it is possible to obtain a home loan.
Many people are confused by the advice that a down payment of 20% or more is ideal when taking out a loan. However, this is actually just a tip, not a general rule.
How does a home loan work?
Thus, before closing a real estate financing agreement, it is interesting to learn more about this modality. Thus, when closing a mortgage loan, you will have important information that will help you choose the best mortgage loan. Therefore, it is possible to say that a mortgage is nothing more than a loan to finance a house, given by creditors. Lenders will agree on an interest rate against the borrowed amount to purchase the home.
Therefore, in this type of home loan, the house is used as collateral. Therefore, the bank has the right to foreclose on the house or apartment of the client who does not make payments correctly. It is important to remember that the loan does not become a mortgage until the property is pledged at your residence. In this way, we can say that to become the true owner of the house, it is necessary to make payments within the deadlines that were signed.
What Are the Common Terms of a Mortgage Loan?
When contracting a mortgage, the client will sign some documents that have legal language, in addition to signing a promissory note. Also, in many states, you may be asked to sign a deed of trust. With that in mind, let’s talk about some common terms that the customer needs to know.
Promissory note
The promissory note, or simply “note”, describes how the customer will repay the loan in detail:
- interest rates
- mortgage rates
- Total loan amount
- Loan repayment term (15 years and 30 years are the most common examples)
- Your monthly principal and interest payment
- When is a loan considered overdue
Mortgage
Therefore, it is common for the term mortgage to be used generically to refer to a mortgage loan, but it has a specific meaning. In this sense, the mortgage gives the creditor the right to take possession of the client’s residence and put it up for sale if the client is not making payments under the terms agreed in the bill.
Trust deed
Accordingly, in many states, it is common to require a deed of trust. This deed works in a similar way to a mortgage and is the creditor’s real guarantee. Therefore, through this deed, the creditor is added as an administrator, which gives him powers to take over the house in situations where the customer is no longer able to pay the monthly fees.
Mortgage rates
As such, there are some mortgage fees that are charged by a lender. As such, these expenses typically include origination fees, discount points, as well as fees related to processing, document preparation, underwriting, and financing the customer’s loan.
However, these total costs end up including title appraisal fees, surveys, title insurance, registration fees, and other fees. These fees may vary based on the type of mortgage obtained by the customer and location. Typically these fees total from 2% to 6% of the borrowed amount. Therefore, it is safe to say that if a mortgage is valued at $250,000, closing costs could vary between $5,000 and $15,000.
What are discount points
They can also be called “mortgage points”, and are money paid to lenders in exchange for a lower interest rate.
Grade rate
Also, the note rate represents the actual interest rate that will be paid each year based on the amount borrowed by the lender. It is expressed as a percentage rate. However, it is worth remembering that it does not reflect any of the other costs or charges of the mortgage. For this reason, the real interest rate should not be confused in any way with the annual rate.
Annual Percentage Rate (APR)
Typically, the APR is always higher than the rate shown on the note, as it is reflecting all money borrowed, taking into account interest, loan term and fees. In the note it is presented as an annual fee.
The creation of APR was thinking of a way to make it easier for customers to compare loans where costs and interest rates are different. Thus, it was defined by federal law, that the APR is disclosed in all advertising. In other words, the higher the APR, the higher the costs.
Mortgage insurance
It is through mortgage insurance that lenders are protected against losses that may arise if they need to foreclose on a customer who defaults on payments. In the types of loans that are guaranteed by the government, the customer is obliged to pay mortgage insurance, and this does not depend on the down payment. However, in conventional loans, mortgage insurance can be avoided when the customer pays a down payment of 20% or more.
Credit score to be approved for a mortgage loan
Credit score influences when it comes to getting credit to buy a home. After all, the credit score is nothing more than the result of how a customer has behaved and managed in relation to his financial health. How credit has been managed can positively or negatively impact your credit score.
Thus, it is possible to say that It is common for most lenders to require a minimum FICO score. Typically, for a conventional mortgage with an adjustable or fixed rate, the score is 620. Those with up to 580 points can take out a government-guaranteed minimum loan. Those who have up to 500 points in the score can get a loan guaranteed by the government, but they need to make an advance payment of at least 10% of the value of the intended asset.
Conventional Mortgage vs FHA: Advantages and Disadvantages
When taking out the loan, it is common for doubts to arise between a conventional mortgage or the FHA. Both options have advantages and disadvantages.
Advantages of the FHA Loan
The down payment to buy the house is low and may represent only 3.5% of the value of the property. Closing costs are low. Credit score requirements are lower than conventional mortgages. Debt-to-income ratio is slightly higher than what is currently allowed by conventional mortgages.
Disadvantages of the FHA Loan
In the FHA there is an extra cost, which is an initial insurance premium (MIP) which is currently 2.25% of the total loan amount. When the loan is obtained, this amount must be paid in cash or it can be accumulated over the duration of the loan.
Home pricing must reach the maximum required and set by the FHA. Also, FHA interest rates are higher than a mortgage loan.
Advantages of a conventional mortgage
There is greater flexibility in loan terms. Non-compliant home loan without house price caps.
Disadvantages of a conventional mortgage
Lenders often require a higher credit score than the FHA credit score. Must meet strict general eligibility requirements.
Calculating the payment of a conventional loan
Therefore, to calculate the payment of a conventional mortgage loan, we will consider the value of a property worth $280,000, estimating that the payment will be completed in 30 years, that is, 360 months. To carry out the calculation, let’s assume that the APR is 4%. In this way, our calculation arrives at a monthly amount of R$ 1,069.41. This amount already includes interest rate and principal amortization.
Now that you have all the important information, you can do some research and identify which lender will offer you the most attractive rates.