One pivotal milestone in every person’s life is living in the home of their dreams. However, with the constant rising prices of real estate properties, paying the upfront cost can be daunting to aspiring first-time homeowners. So in this article, we will take a deep dive into home loans to make homeownership less unnerving and more achievable.
Explaining Home Loans
A home loan or also known as a mortgage is a type of loan given by a mortgage company, bank, or any other financial institution to purchase homes or real estate properties. It is a secured type of loan, which means the lender can repossess the property and sell it to other people if the borrower can’t pay it off. Generally, it has a lifespan of anywhere from 10 to 30 years depending on the type and nature of the loan. The borrower will be paying monthly installments of the loan, along with the interest that was charged by the bank or financial institution in exchange for its money lending services until the end of the loan period.
How Does it Work?
To qualify for a home loan, an individual should have a conventional credit score and a stable income based on a review of the borrower’s pay stubs to obtain lower interest rates. The reason behind this is because the fewer red flags and the higher the credit score, the more qualified an individual is for the loan. Every time a borrower pays for his or her home loan, the lender splits it into at least four (4) different buckets–which are principal, interest, insurance, and property tax. Aside from these four, homeowners should also budget for other expenses like utilities, maintenance costs, appliances, homeowners association dues, and extra mortgage reserves in case a financial emergency occurs.
If the borrower falls behind on their home loan, the lending institution may charge a late fee as a first consequence of not paying. However, if the borrower incurs overdue payments that are beyond their grace period, the home loan will officially go into default and will eventually lead to home foreclosure. This legal process removes the borrower from the possession of the property so they can sell it to another individual who can pay off the existing mortgage balance. In this case, the borrower should contact his or her loan provider and resort to other solutions, such as consolidated or refinanced loans to ease out interest rates through longer payment terms and stay afloat even if they are struggling with their credit scores.
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Learn about how to get a real estate loan here