Mortgages: Basic Information

 

What is a mortgage and how can I protect my identity in getting a mortgage?

A mortgage represents a loan or lien on a property/house that has to be paid over a specified period of time. Home mortgages are the most common type of mortgage. It’s your personal guarantee that you'll repay the money you've borrowed to buy your home. There are many types of mortgages. Which type you choose usually depends on the length of time you think you'll be in your home or the other financial obligations you have.

Protecting Your Identity – Caution: Under no circumstances should you sign blank forms giving your lender permission to obtain tax or personal financial information on you. Be specific about personal information that you grant authority for lenders to obtain in the verification process. You should confirm the name of the lender designated to receive the information, insert the specific information that you wish released, and date the authorization ( e.g., Form 4506, Request for Copy of Tax Form or Form 4506 – T, Request for Transcript of Tax Return should always specify the tax years to be released).

What type of mortgage is right for me?

Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Below is a list of the most common mortgage types:

• Fixed-rate mortgages – This mortgage offers an interest rate that will never change over the entire life of the loan. The length (known as the term) of your fixed rate mortgage can be 15, 20 or 30 years. Note: The higher the interest rate, the higher your monthly mortgage.
• Adjustable-rate mortgage – An adjustable-rate mortgage (ARM) has an interest rate that changes based on varying market rates and economic trends. An increase in the interest rate will result in a higher monthly payment.
• Federal Housing Administration Loans (FHA) and Veterans Administration (VA) – Government housing loans help lower the costs of mortgages so more people can afford to own their own home. Only approved lenders can offer these loans, and the property must meet required standards. 

Make sure you select the mortgage that is right for you, your future plans, and your financial situation.

How do I know if I can get a mortgage?

A lender will look at your employment and credit history to determine your ability to make mortgage payments. Lenders want to see stability. They look for steady employment with a single employer for the past two years (or at least employment in the same field). They will also look closely at any late payments during the last two years of your credit history. Lenders typically pay particular attention to any rent or mortgage payments that were over 30 days past due. In order to qualify for a mortgage, most lenders require that you have a debt-to-income ratio of 28/36. This means that no more than 28 percent of your total monthly income (from all sources and before taxes) can go toward housing, and no more than 36 percent of your monthly income can go toward your total monthly debt (this includes your mortgage payment). Your bank account information will also be verified.

Based on the type of mortgage you're interested in, lenders will obtain, or ask you to provide, some or all of the following financial documentation:

• Credit report
• Pay stubs for the past 30 days
• W-2 forms for the past 2 years
• Information about debt obligations, e.g., car loans, student loans, tax liabilities, liens (including federal tax liens), bankruptcies, etc.
• Recent statements from your checking, savings, mutual fund, or other accounts
• Tax returns for the past 2 years if you're self-employed
• Proof of any supplemental income
• Records of any negative credit accounts that have been paid off
• Records of child support or alimony

How do I find a lender?

You can get a mortgage from many different sources, like mortgage banking companies, commercial banks, community banks, credit unions, mortgage brokers, and other financial institutions. To find a lender, you can:

• Contact your bank or financial institution. Sometimes lenders can offer better mortgage terms to their own customers. 
• Talk to real estate professionals 
• Consult a non-profit housing counseling agency in your area
• Ask family members, friends, and coworkers
• Use the Internet
• Look through your local newspaper or telephone book

When you're looking for a mortgage, it's important that you find a lender who will work with you to meet your needs.

Is there a tax benefit to getting a mortgage?

You may be able to deduct the interest you pay on a home mortgage on your income tax return if you itemize your deductions. You will need to use a Schedule A to find out if your total itemized deductions are more than the standard deduction. For information on deductions related to home ownership see IRS Publication 530, Tax information for First-Time Homeowners.

What else do I need to know?

While most mortgage lenders and brokers have your best interests in mind, there are lenders that may try to take economic advantage of you. There are lenders that target people who may have fewer credit choices or are perceived as higher credit risks. They usually reach out to elderly and low-income homebuyers, minorities and women, people with less than perfect credit, and people who know very little about home loans and mortgages.

Be suspicious of anyone who offers you "bargain loans," whether they mail or e-mail you an offer, call you on the phone, or come to your door.

Avoid promises of "No Credit? Bad Credit? No Problem!"

For more information on how to protect yourself from unfair or deceptive lenders, contact the Bureau of Consumer Protection in your state.
 

For more information, visit the Tax Videos section of this site.