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Home financing is a secured loan that uses property as security for the indebtedness. Most individuals do not have the amount of money to pay for the full purchase price for a home. Rather, they will use a down payment along with a loan to buy a home. With time, the borrower can pay off the loan in affordable monthly payments. While the loan is in repayment, the lender will place a lien on the house to protect its security interest.

It can also be feasible to get a second home loan or home equity credit line. With either of these products, they often use a second place lien behind the first home loan. After the first lien has been fully paid off, the rest of the profits of the home can be used for the second lien. In the end lien holders have been fulfilled, the homeowner gets the remainder of the profits.

Qualification

To get a mortgage, almost all lenders require that borrowers meet strict earnings and home collateral specifications before financing the borrowed funds. An essential idea to learn is the debt to income (DTI) ratio. This is where all of the monthly minimum debt payments are divided by the monthly income. If the ratio is too high, the lender will not approve the borrowed funds.

Another significant qualification to get a home loan is the loan to value (LTV). Today, no lender can make a loan that's greater than the current evaluated worth of the home. However, some loan companies may not go above 60% to 80% of the LTV. Generally, second homes and investment properties will have a more stringent LTV ratio that is lower than a loan on the owner's principal residence.

Escrow Account

Oftentimes, the main balance on the home loan is not the only thing that's needed is to be paid each month. Many borrowers are also required by the loan provider to finance an escrow account for home taxes and homeowners insurance rates. The bank can pay the required taxes and insurance rather than the homeowner. There is a cushion amount above the real amount needed included in the escrow account also.

The monthly payment includes one month's price of the escrow account, which could add hundreds to the monthly home loan payments. Likely borrowers should remember to include the escrow payment amount when calculating how much repayment will cost.

Foreclosure

If the borrower doesn't make monthly mortgage payments, the lender can start foreclosure proceedings. In order to avoid foreclosure, the borrower will have to make all scheduled payments in addition to any additional interest and late fees. The further behind a homeowner is on making payments, the harder it is to get out of foreclosure.

With respect to the kind of loan and state laws, the lending company may be able to go after the borrower's other assets if the foreclosure sale doesn't produce enough funds to pay off the loan. Also, a foreclosure is extremely damaging to a credit report. It is almost as serious as a bankruptcy. Borrowers should try to avoid foreclosure.