Do your research to keep yourself informed about the process.
You should be crystal clear about the terms and conditions before signing the
loan document. If you come across terms that you do not understand, ask about
them. Don't assume that things will work out fine. They probably won't. This
doesn't mean that your lender is trying to cheat you. They aren't, but you
might assume that your mortgage will work in a certain way. And when you later discover
that your assumptions were wrong, you will be in for an unpleasant surprise.
An inability to understand the terms specified in the loan
document will land you in trouble. Some mortgages, for example, come with
prepayment penalties. These penalties limit the repayment options you have. If
the mortgage comes with a prepayment penalty, you will have to pay additional
fees if you pay off the loan in 1- 3 years. Now that interest rates are pretty
low, you will definitely not want to choose a mortgage with a prepayment
penalty.
Here is a glossary of terms you might come across in your
document.
Amortization
The word amortization is used to refer to the process of
reducing an amount of money owed by making regular payments. During the initial
years of your mortgage, the major chunk of your monthly payments goes towards
the interest. Towards the end of the term, you pay more principal and less
interest.
Comparables
The term comparables refers to comparable properties in your
area. While appraising your home, an appraiser will consider the price at which
similar homes in the locality were sold.
Escrow
Every month, a certain percentage of your mortgage payments
goes to your Escrow account. Escrow will hold this amount to pay your yearly
bills such as mortgage insurance, property tax, and homeowner's insurance.
Federal Housing
Administration (FHA)
FHA is a US government agency. It sets the mortgage
underwriting standards and insures home loans made by banks and private
lenders. FHA loans make homes more affordable because they allow people to
borrow with less equity or lower down payment.
Lien
The word lien means that somebody has a legal right to
somebody else's property. The mortgage is a kind of lien. It gives the lender
the right to seize the borrower's property if terms specified in the mortgage
are not met.
These are some of the terms you will come across during your
home loan application process. There are several others, too. Here is a quick
overview of some missteps you must not make.
Your credit score determines your chances of
getting a loan, so review it frequently. Avoid opening any new line of credit
as it may affect your score. Do not change jobs in the months before applying
for a home loan. If you must change jobs, wait until you get the sanction
letter.
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