Mortgage Basics

Generally, buying a home is the biggest financial investment you will ever make. Before looking at homes, you should determine what price range you can afford. You can do this by contacting a lender to get "preapproved". This process allows you to focus on a price range and makes you a more attractive buyer. At the same time, a lender can review with you your credit report.



Discuss with the loan officer what type of loan best fits your financial needs. Mortgage terms are usually 15 or 30 years. Some interest rates are fixed and others are adjustable. Adjustable rates may be best for buyers who plan to sell within a short time frame such as 3 years. It is a good idea to shop around for mortgage rates. Credit unions, banks and mortgage companies all offer mortgages. In addition to interest rates, compare the costs that each lender will charge. These costs might include loan origination fees, application fees, appraisal fee, title search and title insurance, recording fees etc.



There are many different types of loans available:

  • Conventional loans: Conventional mortgages limit housing costs to 28% of gross income and total debt payments to 36% of gross income. You may have to pay 5%, 10% or more down on the total purchase price. In addition, you may have to purchase private mortgage insurance. Private mortgage insurance is paid by a borrower to protect the lender in case of default. It is typically charged to the borrower when the loan-to-value ratio is greater than 80%.
  • FHA loans: A government-backed mortgage loan guaranteed by the US FHA and the Department of Housing and Urban Developement (HUD). These types of loans offer down payements as low as 3% but may require the buyer to purchase mortgage insurance.
  • VA loans: A government-backed mortgage loan supported by the US Veterans Administration. The VA offers no-money down mortgages to qualified veterans of the US military.

Your lender may offer other types of financing. Please check with your lender for the type of loan which best fits your needs.