Thursday, December 18, 2008

6 Rules That Decide Mortgage Loans

6 Rules That Decide Mortgage Loans

All over the world people buy homes or invest in real estate by taking mortgage loans. Banks, financial institutions, insurance companies, credit unions, and mortgage bankers offer individuals a large number of options for home loans.

All over the world people buy homes or invest in real estate by taking mortgage loans. Banks, financial institutions, insurance companies, credit unions, and mortgage bankers offer individuals a large number of options for home loans. In each case, the term of the loan, the interest rate, and so on fluctuate based on changing financial market conditions and a real estate boom.

Most home loans or mortgages are standardized to comply with rules formulated by government bodies known as The Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association.

In the olden days the bank or institution you borrowed from lent the money from their own pool of funds. Today the system has changed. Most home loans come from three major institutions:

• The Federal National Mortgage Association.
• The Federal Home Loan Mortgage Corporation.
• The Government National Mortgage Association.

The place you apply for a loan is just the service provider the actual loan is owned by one of the three above. The service provider pools many loans and sells them to one of the big three and just earns a regular fee for taking care of your loan. The big three in turn use the loan parcels and form mortgage backed securities that are sold on Wall Street to generate more funds. Examples of such securities are “Ginnie Mae Bonds.” However there are exceptions, loans above USD 333,700 do not conform to the guidelines established by the big three and such loans are known as non-conforming loans which are backed by different investors.

Every financial service provider uses a loan origination process which begins with receipt of a loan application and ends in the loan being sanctioned through an agreement reached between the borrower and lender.

The process includes:

1. The application duly completed.
2. Validation of application and credit scoring of borrower.
3. Gathering of information from third parties such as land title authority and insurance companies.
4. Risk analysis and pricing.
5. Underwriting procedures.
6. Completion of terms and conditions and signing of an agreement.

If you want the process to be smooth with no hitches you need to ensure:

That your application form is completed in full with all relevant documents attached. Always request a mortgage consultant or the loan office at the lending institution to check that you have completed all essential formalities.

Get a complete set of documents from the seller of the house and if possible buy a property that has a clear title deed and no outstanding loan payments.

Get a credit report from an established agency and check the report for errors and accuracy.

Prepare a detailed financial statement that establishes your ability to pay back the loan. Attach copies of your tax returns.

Apply for a loan with a bank or finance company where you have an account and on going relationship. When a lender knows you and is sure he can trust you the machinery will move smoother.

Get a co-obligant for the mortgage with a good credit score and solid financial standing.

Apply for a loan that you can afford. Never ask for more than you can pay back comfortably.

When applying for any loan or mortgage understanding the loan process will enable you to complete the formalities much quicker.

By: Barry Allen

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