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Mortgage loan types[edit]

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.

• Interest: Interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
• Term: Mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
• Payment amount and frequency: The amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
• Prepayment: Some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.

The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In some countries, such as the United States, fixed rate mortgages are the norm, but floating rate mortgages are relatively common. Combinations of fixed and floating rate mortgages are also common, whereby a mortgage loan will have a fixed rate for some period, for example the first five years, and vary after the end of that period.

• In a fixed rate mortgage, the interest rate, remains fixed for the life (or term) of the loan.^[5] In case of an annuity repayment scheme, the periodic payment remains the same amount throughout the loan. In case of linear payback, the periodic payment will gradually decrease.
• In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, for example, 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.

The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well.

Main article: Mortgage underwriting

Loan to value and down payments[edit]

Main article: Loan-to-value ratio

Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower make a down payment; that is, contribute a portion of the cost of the property. This down payment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a down payment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property.

The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.

Value: appraised, estimated, and actual[edit]

Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are:

1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available.
2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal.
3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.

Payment and debt ratios[edit]

In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc. the specifics will vary from location to location.

Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income.

Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable under certain circumstances.

source wiki

Three Ways on How to Apply for a Home Loan With Bad Credit

Even if you have bad credit, there are ways to borrow money from financial institutions that do not have stringent rules and regulations as far as credit scores are concerned. Though your credit scores will still be checked, some financial institutions actually target people with low credit scores and will show more empathy to your financial situation.

The only caveat here is that sometimes, the interest rates will be higher than the typical bank loan. This is fine, most especially so if you are now in a good financial standing. You may have a bad credit history but if your current financial status shows that you have the capacity to pay, lenders will still take the risk to loan you money for your dream home.

Apply for Home Loans from Credit Unions

Credit unions are just like banks. They lend money on interest but they have lesser interests because they do not have as much overhead as the big banks. In addition, credit unions do not have comprehensive details about your credit history as those with big banks. Credit unions will usually use credit reports from third party vendors. Credit unions are non-profit organizations. This means that members who are in the same industry get together and loan money to other members. This is why the interests are low.

Apply for Home Loans from Peer to Peer Organizations

Peer to Peer or P2P is the fastest growing credit industry today and most of these are online. This means that you do not have to go to the organization in person. A P2P organization has an unlimited number of members, or lenders and borrowers. People from around the world will sign up and lend money to those who are in need. Most of the time, not one single person has to lend the entire amount that a borrower needs.

The peers, as they are called, pool their money together until a target amount is achieved. This money is loaned to you, the borrower, at interest rates that is competitive enough against banks. On average, P2P charges a 6.5% interest rate per year.

As a borrower, you need to sign up and provide details such as your name and income. You have to provide a reason for your loan and wait until several peers, or investors, to check your credit history. Even if you have a bad one, you will still qualify because the lenders make their personal decisions and will lend you money at their own risk, unlike banks that have high standards.

Apply for Home Loans from Sub-Prime Mortgage

People who have bad credit scores can apply for sub-prime home loan instead of the typical Prime Loans. The low credit score of the buyer will be the determining factor on how much interest should be paid. Typically, sub-prime mortgages have higher interest rates because there is a higher risk of you not paying your debt. The high interest rate will compensate for this risk.

Once you apply for a loan, the lenders will take a look at what is called risk-based pricing. As mentioned earlier, your bad credit score will significantly affect the interest rate. If your credits score is really bad, you should expect higher interest rates. Your payment delinquencies will be checked, along with debts that you defaulted.

The main problem with sub-prime loan is that you may pay high amounts if you are penalized for being late or if you decide to pay your entire loan earlier than the agreed end date, which is also called pre-payment penalty. You need to carefully ask your lender about these so you do not get surprised if you are charged penalties.

Did you find this article informative and relevant? If you did and you need articles like this for your blog, please mail him at matthew@aaronmatthewang.com.

Aaron Matthew Ang is a seasoned web content writer with over seven years of experience. He has written in dozens niches and practically all topics under the sun. To date, he has written more than 1000 combined articles and eBooks for various niches.

He is currently working as a Quality Director in the BPO industry and owns Acidic Wit Creative Writing Services, a company dedicated to providing high quality web content.

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