Angie's LIST Guide to
Mortgage loans

Buying a home is still the one of the most reasonable financial investments for American families. The global financial crisis, the subprime mortgage meltdown and the credit crunch may have left real estate investors on Wall Street high and dry, but for average Americans the dream of home ownership is not so much a matter of realizing huge profits, but rather a sensible investment that can bring peace of mind to their families.

The process of purchasing a new home will invariably involve applying for a mortgage loan. While it's possible to buy a house with cash, current real estate prices put cash purchases essentially out of reach for most home buyers. Considering that the median home price in the United States floated around $160,000 at the end of 2011, a mortgage loan is still the preferred method to home acquisition.

The mortgage lending industry has undergone comprehensive reform since the heady days of subprime lending before 2008. Credit and underwriting guidelines have become stricter than ever and there is an emphasis on financial education. The following information should be read as a guide for house shoppers who will more than likely choose a mortgage as the path to home ownership.

Affordability should be the foremost aspect of any mortgage application process. This is determined by the buyer's income, the amount of cash that can be set aside as a down payment, their current debt obligations, the potential expenses required to maintain the household and the amount of the monthly mortgage payment due to the lender each month. To calculate a mortgage payment, applicants must also understand the current financial terms in the market. Typical terms include:

• Interest rate
• The term of the loan, also known as the life of the loan
• The down payment
• The housing expense to income ratio

Home affordability can be determined by a mortgage broker or bank loan officer during the prequalification process. A mortgage professional can calculate how much home can be afforded by analyzing the applicant’s income, debts and assets. While real estate agents used to perform prequalifications in the past, now the preference is for the process to be performed by mortgage loan professionals.

After the prequalification is taken care of, the preapproval process comes next. A borrower's credit worthiness and their ability to repay the loan are considered in this step. This is when preliminary loan amounts and the possible amount of monthly payments are communicated to the applicants. Most preapprovals will not include the type of mortgage loan or how much it will cost to the borrower to obtain the loan.

The power in the mortgage lending industry has mostly shifted to the banks. Mortgage brokers are still plying their trade but new licensing and compliance requirements have greatly reduced their ranks. Whether a home shopper applies for a mortgage at a major bank through a loan officer, or with a mortgage broker, it is important that borrowers find an individual who will help them through the process from a financial planning point of view.

To ensure that reliable mortgage professionals are chosen, borrowers should feel free to ask the following questions:

• What is the best mortgage product for me?
• How much of a down payment do I need to have at closing?
• How much am I going to have to pay for points?
• What personal debts, such as credit cards, should I pay down before closing?
• How much will I pay for title insurance? What about flood and homeowners insurance?
• Is it better to pay for insurance and property taxes each month in escrow, or should I take care of that on my own?