Buying a home is one of the most exciting times in our lives. We work hard to make sure the experience is positive, secure, exciting, and overall amazing. Knowledge is power, so here is some key information.
The loan approval process generally begins with an initial interview where you and your Loan Consultant will discuss your income and long term debts. This step is called pre-qualification* and it can help you shop for affordable properties in the correct price range. When a lender makes a decision about a mortgage application, they consider many basic factors: all based on your ability to repay the loan. To ensure your loan is truly affordable, a lender will verify your employment and income. Your monthly Debt to Income ratio – your total income, minus monthly credit payments and other debts — will also be considered.
Total Monthly Payments
Your monthly mortgage payment typically is made up of four components: principal, interest, taxes, and insurance, together known as PITI. The principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. The interest is the fee charged for borrowing money. Taxes refer to property taxes your community levies which are generally based on a percentage of the value of your home. The lender usually collects 1/12th of the yearly property tax bill each month. The insurance amount is collected and paid much like the taxes. Each month 1/12th of the insurance bill is collected and stored in an escrow account until the bill is due. Principal and interest comprise the bulk of your monthly payments in a process called amortization, which reduces your debt over a fixed period of time.
Closing costs are the actual expenses incurred in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of a credit report on all applicants. Other fees are related to the house itself, such as the property appraisal. Others are payment to the lender for processing your application, such as the loan origination fee.
Common closing costs can include processing and underwriting fee, mortgage insurance premium, appraisal fee, the cost of a credit report, tax service fee and other fees. Escrow accounts are required for many loans and require cash deposits at closing.
*A pre-qualification is not an approval of credit and does not signify that underwriting requirements have been met.