Buying a home is likely one of the biggest financial commitments you will ever make in your life, so it’s important to understand the basics of getting a mortgage loan. Knowing how mortgages work, what types are available, and how to qualify for one can help you find the best deal possible.
Don’t worry! In this article, we’ll walk you through the basics of getting a mortgage loan so you can confidently navigate your way to homeownership.
What is a Mortgage?
A mortgage is a loan from a lender or bank that you can use to purchase real estate. The property you buy acts as collateral, meaning if you fail to make payments on time, the lender can take possession of it. Mortgages usually require borrowers to put down at least 20% of the purchase price as a down payment.
Types of Mortgages
There are various types of mortgages available, and each has its own terms and conditions. Here are some of the most common:
- Fixed-rate mortgage– A fixed-rate mortgage has an interest rate that remains the same for the whole loan term, usually 15 or 30 years. This means your payment amount will stay the same regardless of how high or low market interest rates go.
- Adjustable-rate mortgage (ARM)– An ARM has an interest rate that can adjust over the course of the loan. This type of mortgage starts off with a lower fixed rate but can change depending on market conditions.
- FHA loans– FHA loans are insured by the Federal Housing Administration and require less than perfect credit to qualify. They also typically have lower down payment requirements than other mortgage types.
- VA loans– VA loans are for military personnel, veterans, and their spouses. They offer 100% financing and there’s no required down payment or mortgage insurance.
Qualifying for a Mortgage
Before you can get approved for a mortgage, there are some basic criteria that lenders will typically look at. These include:
- Your credit score– This number indicates how well you’ve managed your finances in the past. A higher credit score is more likely to get your application approved.
- Your income and debt ratio– Mortgage lenders want to know that you make enough money to cover your mortgage payments and other monthly bills. They also want to see that you’re not overextending yourself with too much debt.
- Your employment history– Lenders like to see a stable work record. If you’ve changed jobs too often, it can make getting approved for a loan more difficult.
Applying for a Mortgage
Once you’ve determined that you qualify for a mortgage, it’s time to start the application process. Here are some of the steps involved:
- Get pre-approved– This means applying for a loan before you actually buy a home. Pre-approval will give you an idea of what type of loan you can qualify for, how much lenders are willing to lend you, and how much you’ll be able to afford.
- Provide documents– You will need to provide documents such as tax returns, bank statements, and proof of income.
- Get the home appraised– The lender will need to appraise the home you’re interested in buying to make sure it’s worth close to what you’ve offered.
- Close the loan– Once all of your documents have been verified, you can sign the paperwork and officially close on the loan.
Finding the Best Deals
Getting the best deal on a mortgage loan can mean saving thousands of dollars over the life of the loan. To find the best deals, here are some tips:
- Shop around– Compare mortgage rates from different lenders to make sure you get the best rate.
- Compare fees– Make sure to check for additional fees, such as origination fees or closing costs, that can raise your total cost.
- Check interest rates– Low-interest rates can save you a lot of money over the life of the loan.
- Ask questions– Don’t be afraid to ask your lender questions about the loan application process or mortgage options available.
- Work with a qualified professional– Having an experienced mortgage lender or broker help you can make the process easier and ensure you get the best deal possible.
Now that you understand the basics of getting a mortgage loan, you’re on your way to becoming a successful homeowner. Good luck!