In general, three broad categories of loans are available:

1. Private vs. government loans. Most mortgage loans are made by savings institutions, banks and mortgage companies. Generally, a lender will require you to buy mortgage insurance, particularly if you make a low down payment. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event of default.

On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Government loans have important advantages--they generally require a lower down payment than conventional loans and often have a lower interest rate or points. On the down side, government loans limit the amount you can borrow, often take longer to process, and sometimes have higher closing costs.

2. Fixed rate vs. adjustable rate. On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for adjustments on taxes and insurance.

Adjustable rate mortgages (ARMS) have interest rates or monthly payments that can go up or down over time. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages and often appeal to first-time homebuyers, younger couples who expect their incomes to grow in the coming years, and people who might not have much cash for down payment and closing costs.

If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the lifetime interest-rate cap (the maximum rate you will be charged no matter how high rates go in the market), the index that will be used to calculate future interest rates, and how index charges will affect your mortgage. Other good questions to ask include: What is the start rate? How long does the start rate last? What is the maximum monthly payment increase? What is the maximum interest rate increase? Can the loan be prepaid in whole or in part at any time and without penalty?

3. Assumable vs. new loan. Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner.

Assuming a loan may save some costs and time. As the buyer, you would typically pay the lender a fee at closing for processing the assumption.

The true price of financing

When shopping for a loan, don't judge the loan by the interest rate alone. Compare several items in the entire loan package, including:

• Points on a low-interest-rate loan can be double those for a loan with a higher interest rate, causing you to pay more up front.
• Total fees charged by the lender. Some lenders will absorb the cost of many services, while others do not, so ask in advance.
• Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay over the life of the loan. For example, a 30-year, fixed-rate loan will cost more in interest than a 15-year, fixed-rate loan.
• Penalties. Ask what penalties will be charged if you pay off the note early. A prepayment clause could require you to pay a penalty if you pay off the loan early, such as refinancing the loan at a later time.

Loan approval process
From the lender's viewpoint, approving the loan, based on your financial standing, is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the loan as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verifications of employment, deposits, and other matters must be obtained. Loan documentation and conveyance instruments must be drawn and approved. In addition, the title company must research the title and arrange for paying off any liens, taxes, and other costs. All these conditions and others must be satisfied before a transaction can close.

Underwriting
Underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrower's credit history, which is detailed in a credit report; and the lender's evaluation of the borrower's credit needs and ability to pay.

Hazard insurance
As another protection, the lender may require insurance to protect against fire and storms. (Flood insurance could be required if the house is in a flood plain.) Even if not required by a lender, it's probably a good idea for you to consider all types of insurance.  Do not wait until the last minute. Find out if insurance is required to get your loan early in the process and if it is, do not wait.  Not arranging for insurance when it is required may stop the loan process and delay closing. 

Closing the Deal

The closing is the end of weeks or even months of research and decision making. The closing could last less than an hour but may take longer, depending on the complexity of the transaction. It often occurs at the title company's office. The title company officer will explain each document before you sign. You may want your attorney present as well.

Two basic kinds of documents
If buying a home were strictly a cash transaction, you would simply hand over the money and receive the deed. More than likely, however, you are borrowing money for the home, which means that you are actually making two transactions--acquiring the loan and buying the home.

As a borrower, you will sign a note promising to repay the loan and a deed of trust (also known as the mortgage) pledging the house (or other collateral) as security for the note. You will also sign numerous other papers including acknowledgments, disclosures, surveys, certificates, etc. Be sure to read each document carefully. Ask questions if you do not understand anything. There are no dumb questions. Seriously consider having your attorney present at closing.

As a homebuyer, you will present a cashier's check (or other good funds) to the seller, sign a document that itemizes closing costs (the lender will have given you an estimate in advance), and pay your share of the closing costs. In return, you will receive a deed, transferring ownership rights to you.

The home is yours
At the end of the meeting, you will likely receive keys to the property. At that moment, the home will be yours. Occasionally, possession of the property will occur after closing. For example, the seller may have negotiated with you for a few extra days after closing, or the loan will not immediately fund, or other concerns. But, in most transactions, you will be the new owner at the end of closing.

Keep Out of Lending Trouble

Some other points to keep in mind:

• Buyer/seller agency. It's important to understand who your REALTOR® represents--buyer or seller. The REALTOR® will provide you with information about representation. As a buyer you may sign a buyer representation agreement with a REALTOR®. It will discuss the scope of the REALTOR's® representation.
   
• Prepaids. You should be aware that your closing costs will include prepayment of an escrow account to cover insurance and taxes.

• REALTORS® are required to make properties available without regard to race, color, religion, national origin, sex, disability, or family status.

• Be sure to have a property inspected by licensed inspectors to determine: a) the condition of the property (structural, mechanical, electrical items, etc.); b) any environmental conditions (asbestos, lead-based paint, toxic materials, etc.); c) wood-destroying insects; and other matters. Brokers are not qualified to perform such inspections.

• Residential service contracts can offer repair to appliances, electrical, plumbing, heating, cooling, or other systems in the property.

• Be sure to obtain a policy of title insurance or have an abstract of title reviewed by an attorney of your choice before buying a property.

• Consider seeking the advice of an attorney of your own choice before entering into a binding agreement.

Source: Texas Association of REALTORS®

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Note: Most of the information is based on Real Estate transactions in Texas and may not pertain to another state.

Information is believed to be accurate but is not guaranteed