The largest debt you'll ever take on, a mortgage is a loan to finance a real estate purchase. The property is collateral for the loan. The mortgage is a legal contract you sign to promise that you'll pay the debt, with interest and other costs, typically over 15 to 30 years.

If you don't pay the debt, the lender has the right to take back the property and sell it to cover the debt. To repay the debt, you pay monthly installments that typically include the principal, interest, taxes and insurance, together known as PITI.
Principal
The principal is simply the sum of money you borrowed to
 buy your home. Before the principal is financed you can give the lender a sum of cash called a down payment to reduce the amount of money that will be financed.

Interest
Usually expressed as a percentage called the interest rate, interest is what the lender charges you to use the money you borrowed. As well as the given rate, the lender could also charge you points, and additional loan costs. Each point is one percent of the financed amount and is financed along with the principal.

Principal and interest comprise the bulk of your monthly payments in a process called amortization, which reduces your debt over a fixed period of time. With amortization, your monthly payments are largely interest during the early years and principal later.

In addition to your principal and interest, your mortgage payment could include money that's deposited in an escrow or trust account to pay certain taxes and insurance.
Generally, if your down payment is less than 20 percent, your lender considers your loan riskier than those with larger down payments. To offset that risk, the lender sets up the escrow account to collect those additional expenses, which are rolled into your monthly mortgage payment.

Taxes
The taxes are property taxes your community levies based on a percentage of
the value of your home. The tax is generally used to help finance the cost of running your community, say to build schools, roads, infrastructure and other needs. You must pay property taxes even if you don't need an escrow account and even after your mortgage is paid off.

Insurance
Lenders won't let you complete your home purchase if you don't have home insurance, which covers your home and your personal property against losses from fire, theft, bad weather and other causes. Even if you pay cash for your home, you should buy home insurance unless you can afford to repair or rebuild your home if it's damaged or destroyed.

If your home is in a federally designated high flood risk zone within a flood plain and you are signing for a federally insured loan, federal law mandates that you must buy flood insurance. If you are not in a high flood risk zone, you still may buy the coverage.

Private Mortgage Insurance
If you put less than 20 percent down on your home purchase, most lenders will also charge you private mortgage insurance (PMI) premiums. Coverage doesn't protect you, it protects the lender from your defaulting on the mortgage. Without coverage, many buyers could not otherwise afford to buy a home. Effective for loans written on or after July 29, 1999, lenders must automatically cancel PMI when your mortgage balance shrinks to 78 percent of the home's original purchase price.

Credit
Credit reports are often difficult to decipher. Your loan officer can go over yours with you. Local non-profit organizations also provide this service at no cost, as do credit-counseling agencies.

Your report shows the date you opened an account or took out a loan, your credit limits or loan amounts, current balances and monthly payments. It also shows late payments, missed payments, accounts that have been turned over to collection agencies and repossessions, all taken from information provided by the companies with which you do business.

The report contains data from public records, including bankruptcies, foreclosures, tax liens, monetary court judgments and, in some places, even overdue child-support payments. The credit report also lists names of companies that have obtained a copy of your credit report and how often you have applied for credit over the last two years.

Check for accuracy
Make sure the information in your report is up-to-date. Many companies don't report to the three credit bureaus as frequently as they should. So if you've recently straightened out a dispute with a creditor, it may not have been reported yet. Some companies only report when you're late and don't bother reporting that you pay on time.

Old and out-of-date info that no longer reflects how you use credit. By law, for example, bankruptcies are supposed to be expunged from your records after 10 years. The more recent the problem, the more significant to the lender. A 30-day payment that was late 3 years ago isn't as important as one that was late 3 months ago. Lenders are concerned with how you deal with credit now.

Look for misdated account closings, especially if you had to ask repeatedly to terminate an account. When companies are notified that they have failed to close accounts as previously requested, they close the account on the date of the most recent request instead of the original one. That can lead to problems because recent account closures are often taken as a sign of financial difficulties.

Your Credit Score
To speed the process and cut costs, lenders rely on automation to underwrite their loans. To help evaluate your credit, they use statistical modeling to come up with a credit score, a computer-generated number based on the data in your credit file.
The score takes into account the same things human underwriters do:

• The number and frequency of late payments
• The number of credit cards you have
• Whether you consistently live at your credit limits
• Whether you have savings
• The frequency with which inquiries are made about your credit

But the computer is much faster because it can make recommendations in a matter of minutes. And because it is blind to your race, religion, gender, national origin, marital status and income, it's more objective, too. Furthermore, applicants who don't score high enough with the computer aren't rejected. Rather, they are referred to a human who may be able to take "compensating factors" into account.

Underwriters looks at other factors. These include:
• Buying or refinancing
• Occupancy is full or part-time
• Down payment
• Type of loan and its duration
• Type of property
• Employment
• Cash reserves after you close the loan