Guide for mortgages in California

If you are going to buy a home in California, you are going to need a mortgage, unless you have a store of money lying around to use to pay cash for your home. Before you sign on the dotted line for your mortgage, make sure you know what you are agreeing to. After all, your mortgage is a long-term financial agreement, so you should know as much as you can about it at the outset.

Basic Structure of a Mortgage

Since most people do not have the cash stores necessary to pay for a home in full, they will usually borrow money from a lender for the purchase of the home. The property in question is the collateral for the loan, which means that the bank or lender has the right to take the home if you do not pay the loan according to its terms.

A mortgage is considered an amortized loan. This means that you have a set number of years in which you must pay back the loan and the interest on it. In California, most loans are amortized for around 25 years, but this can vary based on the loan structure. The amortization period is separate from the term, which is the period that the interest rate is guaranteed. Sometimes the term and the amortization period are not the same, which means you will need to negotiate a new mortgage term when the first one is over.

Finally, a mortgage has an interest rate applied to it. This is the percent of the total loan amount that you will pay to the bank for the privilege of borrowing the money. Your goal should be to find a loan with the lowest possible interest rate.

Getting Approved

Once you have decided that you wish to buy a house, it is time to get approved for a mortgage. Shop around to find a lender with good rates, and then apply. Your approval will be based on the size of the loan, your credit rating, employment history, and current income, among other factors.

Making a Down Payment

Most lenders require you to make a down payment on the property you wish to buy. This shows them that you are responsible with your money and have a good intention of paying what you owe on the loan. It is generally recommended that you put down a 20 percent down payment. You can put down more if you wish. You can also put down less, but if you do you will have to buy mortgage insurance.

What is mortgage insurance? Under the Californian Bank Act, federally regulated lending institutions, with a few exceptions, cannot provide loans that exceed 80 percent of the value of the home without purchasing mortgage insurance. This insurance protects the lender against the possibility of default, which statistics have shown is more likely when the borrower does not place at least 20 percent down on the home. The premium on the insurance policy is typically determined based on a percentage of the home's purchase price. You will typically pay this premium as part of your loan payment each month. This allows you to purchase a home with as little as 5 percent down.

Mortgage recap for 2008

One big mistake many homeowners make when they begin having problems paying their mortgage is to try and solve the problem alone. Or worse, some people simply ignore it; hoping that things will improve. These are actions that lead to bigger problems down the road. Ignoring the fact that you cannot meet your mortgage obligations may lead to losing the house and damaging your credit.

Once it's obvious that you have problems with payments, the prudent thing to do is to contact your lender. Mortgage companies are not interested in owning property; they want the returns from loans and will most often work with homeowners to find solutions.

Despite all the gloom and doom, foreclosure, or the threat of it, isn't the end of the line for homeowners. There are ways to weather the storm. Some of these include:

* Talk to the mortgage company or bank and ask for time to get caught up before they start legal proceedings leading to foreclosure. This is known in the real estate sector as forbearance. Some institutions will help you work out a repayment plan.

* Talk to lenders and request a plan to spread out payments so as to catch up on missed payments. This type of arrangement usually calls for making a larger monthly payment.

* Refinancing is another possibility, but must be entered into carefully. This is done when there is equity in the home; the value of the home is greater than the balance on the outstanding loan.

* While not a very popular option, some lenders will forgive a month or two of missed payments. The earlier they are approached, the better the chances to implement this option.

If these options fail or are not available, one popular strategy in the real estate industry right now is a short sale. While this affects your credit rating, it will not have the same dire impact as foreclosure. With a short sale your home is sold for less than the outstanding loan. Experienced real estate agents will work to get the difference of the sale price and outstanding debt forgiven: retiring the debt. In other instances, however, the homeowner may still be required to come up with the difference.

It's important if facing foreclosure to get as much information as possible and to use only qualified persons to help you. For example, if the decision is to go the route of short sale, a certified real estate agent familiar with the process is an invaluable asset. If you plan on asking for time to repay, look for someone who is great at negotiating to help you.