The term "mortgage" is commonly used to refer to the loan someone obtains to buy a home or property. Technically, the loan is one part of the arrangement. The other — the mortgage itself — is a legal claim (a "lien") that gives the lender rights to the home or property used as security, until the loan is paid off. The loan component of the financial package has two key features you should understand. Principal — the amount you are borrowing. For the lender, risk is balanced by their lien on the property. Interest — the additional amount you are paying, over time, to borrow the principal. Because mortgage loans usually take years to pay off, understanding that interest is compounded — "interest on interest" — will help you make sense of the total cost of the home. For fun — the roots of the word "mortgage" are death (mort) and pledge (gage). It captures the long-term promises involved in buying a home.

One of the more common incentives in new-home purchases is the "decorating allowance." This is an offer to upgrade some aspect of the home before closing, such as carpeting, flooring, or appliances. Since builders are buying such things "at scale" for multiple homes, the perceived value of the incentive may be higher than their actual cost. If you are considering a decorating allowance, ask these questions about the allowance offer: Is the allowance credited at closing, and can it be applied to your closing costs? What purchase terms must your accepted offer meet to qualify for the allowance? Check with the lender you have selected to make sure the terms the buyer is offering are allowed in your loan arrangement. At closing, make sure the allowance addendum is included on loan disclosures. And make the allowance/upgrade is valuable enough to you to tip the balance in such an important decision.

A "home warranty" is frequently available at the time of purchase, and may even be a tool in negotiating terms. These warranties provide protection for a short period of time — like 1 year — against unexpected costs in home systems and appliances. A failed heater or oven, for example, might be covered by a home warranty. This financial protection in the period immediately after home purchase can be helpful, especially if down payment and closing have drained cash reserves. Home warranty may not be an option after purchase, so consider the benefits and costs prior to finalizing your deal.

The elevation of a home, in relation to surrounding terrain, directly affect the risks of flooding. Even a few feet of elevation can make a dramatic difference. If the home is on a "flood plain" — an area of land with inherent risk of flooding during high discharge — lenders will usually require flood insurance. If it is near but noton a flood plain, you may have options regarding flood insurance coverage. Flood insurance is covered through the National Flood Insurance Program. Check FloodSmart.gov for details, then shop insurance coverage for a policy that suits your needs.

Homeowners insurance — or the paid receipt for it — is required at closing. Shopping for insurance coverage, and comparing plans early in the home-purchase cycle can pay off. Insurance agents and representatives can be a terrific resource for information. They may help you understand how insurance costs differ between properties. They might also have ideas on reducing coverage with additions like home-security systems. Regardless, proof of insurance will be required to consummate the purchase.

Lending institutions consider your full financial situation in calibrating acceptable loan structure and size. Some of the key factors that will come into play: DTI — Debt to Income — compares your pre-tax (gross) income to your expenses and commitments. Non-housing expenses and commitments, especially long-term debts such as car loans, student loans, child support and alimony. Do you have the cash available for down payment and closing? What is the source of the cash? What is your credit rating? Are there any outstanding or concerning issues in your credit history? The Federal Housing Authority sets general guidelines about these ratios, which lenders will consider. These ratios may be adjusted up or down slightly over time. In the past few years, FHA guidance has recommended that monthly mortgage payments not exceed about 1/3 of gross income. Overall expense-ratio recommendations have been between 40% and 43%. All of these factors will be considered and verified in determining qualifying loan amounts.