The primary purpose of home purchase loans is to give as many people the opportunity to own real estate, especially since the total purchase price does not have to be paid upfront. However, the lender has the right to seize the property from the homeowner and put it back on the open market. This happens when the borrower isn’t able to make payments, depending on the agreements made initially.
Home purchase loans have floating or fixed interest rates, paid along with a contribution to the principal loan amount every month. A fixed-rate home mortgage has the same periodic payment and interest each period. A floating or adjustable-rate home mortgage differs from a fixed-rate home mortgage since it generally has low-interest rates, but the borrower risks increasing interest rates.
Regardless of the home purchase loan you choose, they all work the same way. First, the homeowner must pay down the principal over a specific duration. Then, the interest is calculated on a smaller basis so that mortgage payments apply towards principal reduction rather than paying the interest charge.
How to Apply for Home Loans?
A home loan application
requires the borrower to present the application and attach their financial history to the lender. This proves to the lender that you are capable of paying the loan. If you are unsure which lender to approach, a mortgage broker is better suited to help you find one that suits you.
The initial step of application requires you to get pre-qualified, which involves supplying the lender or bank with a complete picture of your finances. This includes debt, income, and assets which the lender reviews before giving you an estimate of the amount you can borrow. There is no cost involved during pre-qualification, and it is done over the phone or online.
Pre-approval is the second step and involves filling out an official application and supply the lender with relevant documentation for an extensive assessment of your finances and credit rating. Afterward, you will receive a conditional commitment for the exact loan amount, allowing you to search for a home for that same price or slightly below.
How are Home Loans Calculated?
Since interest is calculated based on the balance of each month, the lender multiplies the balance of your loan according to your rate to calculate the interest for each monthly installment.
Once you find a home you want, the last step is loan commitment, issued by a bank after approval. It is common for the lender to put a lien on the home as collateral, as it gives them the right to take possession of the property if the borrower defaults on making payments.