Mortgage Financing

What is a mortgage?
A mortgage is a loan obtained to purchase real estate. The “mortgage” itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

What is a Mortgage Loan to Value (MLTV) how does it determine the size of my loan?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific MLTV limit. For example, with a 95% MLTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay, $2,500 as a down payment.

The MLTV ratio reflects the amount of equity borrowers have in their homes. The higher the MLTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher MLTV loans (80% or more) usually require mortgage insurance policy.

What types of mortgage loans are available and what are the advantages of each?
a) Fixed Rate Mortgages:
Payments remain the same for the life of the loan or mortgage.

Types

  • 15-year
  • 30-year

Advantages

  • Predictable
  • Housing cost remains unaffected by interest rate changes and inflation.

b) Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

Types
– Balloon Mortgage – Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
Two-Step Mortgage – Interest rate adjusts only once and remains the same for the life of the loan ARMS linked to a specific index or margin

Advantages

  • Generally offer lower initial interest rates
  • Monthly payments can be lower
  • May allow borrower to qualify for a larger loan amount

When do Adjustable Rate Mortgages (ARMS) make sense?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.

What are the advantages of 15- and 30-year mortgage loan terms?
The term of your loan should depend on the nature of your business and the purpose for which you need the loan.

Longer-term loans are usually preferable on the basis of ‘time value of money.’ You must undertake a cost benefit analysis on the costs of the loan (interest) and the incomes from the business for which it finances to ensure it the terms are reasonable for your business success. The incomes from the business for which it finances to ensure it the terms are reasonable for your business success.

30-Year:

  • In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
  • As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-year:

  • Loan is usually made at a lower interest rate.
  • Equity is built faster because early payments pay more principal.

Can I pay off my mortgage loan ahead of schedule?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan.

When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

Always ensure that your loan agreement provides for the option of making extra payments in case of good cash flows on your part are accepted to reduce on the principal, as some banks don’t accept them since they affect the budgeted interest income on the loan.

Are there special mortgages for first-time homebuyers?
Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you’ll have.

Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and – possibly -repairs and decorating.

What is included in a monthly mortgage payment?
The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).

What factors affect mortgage payments?
The amount of the down payment, the size of the mortgage loan, the interest rate, and the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

How does the interest rate factor affect in securing a mortgage loan?
A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate “lock-in “which guarantees a specific interest rate for a certain period of time.

You need to clarify this from your financial institution. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.

What happens if interest rates decrease and I have a fixed rate mortgage loan?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

What are discount points?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

What is an escrow account? Do I need one?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable), and property taxes.

Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property tax or homeowner’s insurance, make sure you are not penalized for late payments since it is the lender’s responsibility to make those payments.

What steps need to be taken to secure a mortgage loan?
The first step in securing a loan is to complete a loan application form. To do so, you’ll need the following information.

  • You need to have an Account in the bank you are going to borrow from.
  • Pay stubs (income slips) for the past 2-3 months
  • Financial card (a credit report about the applicant from the Credit Reference Bureau)
  • Information on long-term debts
  • Recent bank statements
  • Tax returns for the past 2 years
  • Proof of any other income
  • Address and description of the property you wish to buy
  • Sales contract

During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase.
The application process typically takes between 1-6 weeks.

How do I choose the right financial institution for me?
Choose the Bank you want to borrow from very carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a Bank that gives helpful advice and that makes you feel comfortable.

A Bank that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it’s beneficial when the bank knows home values and conditions in the local area.

Do your research and ask family, friends, and your real estate agent for recommendations.

How are pre-qualifying and pre-approval different?
Pre-qualification is an informal way to see how much you may be able to borrow. You can be ‘pre-qualified’ over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house. Pre-approval is a lender’s actual commitment to lend to you. It involves assembling the financial records mentioned in Question 13, Section F(without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

How can I find out information about my credit history?
There is one credit reporting company in this country: Credit Reference Bureau. Obtaining your credit report is as easy as calling and requesting one from your Bankers. Once you receive the report, it’s important to verify its accuracy. Double check the “high credit limit, “total loan,” and ‘past due” columns. It’s a good idea to get copy of the report from the CRB service provider to ensure that there are no mistakes.

You are entitled to one free credit report from the CRB service provider in a year.

In Uganda, M/s Compuscan the Credit Reference Bureau (CRB) service provider keeps a database of all people with loans in the banks.

This may soon change to include even those without loan accounts in banksand you will be informed at that time.

What if I find a mistake in my credit history?
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake.

You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record.

Banks are usually understanding about legitimate problems.

What is a credit bureau score and how do Financial Institutions use them?
A credit bureau score is a number, based upon your credit history that represents the possibility that you will be unable to repay a loan.

Financial Institutions use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your Financial Institution for details.

How can I improve my score?
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not over extending yourself by buying more than you can afford.