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Mortgage Basics

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You may have the desire of getting a home of your own, but lack of finance may prevent you from fulfilling your dream. This is where a mortgage can help you. It provides a financing option that can make your dream come true.

Mortgage is a legal process through which a borrower takes a loan for the purchase of residential or commercial property. The same property is kept as the security for the debt. In general, a mortgage transaction involves two parties – the lender or the mortgagee and the borrower or the mortgagor.

Mortgage lenders are concerned about your financial strength in paying for the loan costs and making the monthly payments to clear the debt. So, they will consider your credit score, your monthly gross income, and the amount of cash you can pay as the down payment. The higher your score, the lesser is the risk in offering you the loan.

The loan amount depends on the value of your home and the down payment. The interest rate charged on your loan depends upon your credit score, discount points and down payment. The better your score and the higher your down payment and points, the lower is the rate offered. Getting a lower rate is also possible if you can pay a part of the loan amount as prepaid interest or points. You may get a loan at fixed rates, variable or adjustable rates or a combination of both the rates.

The loan application that you have submitted goes through a process of review before the lender gives his approval. After the lender approves the mortgage, he decides upon the date of closing. The closing involves the signing of legal documents including a mortgage note which obligates you to repay the loan in time.

At closing, the lender requires you to pay for the costs of originating and processing the loan. You will also have to deposit property taxes and insurance premiums into an escrow account which ensures that these payments will be paid in time. The rest of the taxes and insurances are paid along with the monthly mortgage payments in order to protect the lender from tax liens and uninsured losses.

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The down payment often includes funds from a number of sources that can be your Individual Retirement Account (IRA), your 401(k) account as well as gift assistance from your relatives, friends and employer. There are several loan programs that accept gift assistance programs. Some of the sources that can help to acquire gift funds are given below:

  • Withdraw money from IRA
    If you are a first time buyer, then under the laws set up by Internal Revenue Service, you can withdraw funds up to $10,000 from your retirement account to finance your down payment. If you have a spouse, then each of you can take out $10,000 from your retirement accounts. It is easy to qualify for such facility provided you did not own a principal residence during 2 years before the purchase of the present property. In such cases, you may not have to pay a penalty for early withdrawal but whether you have to pay taxes on the money borrowed, depends on the type of IRA.
  • Borrow from 401(k) Plan account
    You can borrow cash from your 401(k) Plan account to make your down payment. But unlike an IRA, a 401(k) Plan account requires you to pay back the money borrowed along with the required interest. The amount repaid will be slightly higher than the amount borrowed since you have withdrawn pretax money but will be paying it back with taxes charged on the amount withdrawn.
  • Gift assistance
    There are loan programs like the FHA (Federal Housing Administration) loans that allow borrowers to accept gift funds from relatives, friends or even your employer, the church or any non-profit organization. But the lender in this case requires you to submit a gift letter from the source as a proof of the gift funds. The best thing about this is that you need not pay back the cash provided as gift money.
  • Assistance from Government, state agencies and non-profit companies:
    There are several local and state agencies which conduct bond programs that provide borrowers with cash required for making down payments. Most agencies have purchase limits for which one can qualify provided he has the required income level.

There are also several non-profit organizations that provide down payment assistance to home owners. The gift amount is equal to 3% of the sales price or it can even extend to about $22,500 in some cases. These assistance programs require borrowers to qualify for any loan program with a particular lender. Buyers can receive free gift allowance through these programs. However, there are other gift assistance programs which require a buyer to undergo a Home Ownership Counseling Course or contribute 1% of their own funds towards the down payment. The amount of gift funds depends on the income and assets of the borrower or whatever amount of reserves are there in the bank. These programs are available with FHA, conforming as well as jumbo loans and they are offered against properties that include Single family (1-4 unit) homes, condominiums, manufactured/modular homes, properties under construction etc.

However, if paying for the down payments becomes a problem, you can apply for low down payment or zero down payment loan programs. Government sponsored agencies like Fannie Mae offers 3% down payment for long term fixed rate mortgages. Even the FHA provides low down payment loans that require 3% to 5% of the sales price as the down payment. The FHA even offers 100% gift funds towards the down payment. The Department of Veteran Affairs offers zero down payment loans but it requires that you to be a qualified veteran.



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