Researching the homebuying process is a hefty undertaking, as there are plenty of unfamiliar terms that you absolutely need to understand when you’re financing a home. If you’re a buyer seeking financing, you’ll want to prepare ahead of time and learn the ins and outs of a mortgage loan.
So, what exactly is a mortgage loan, and who should get one?
A mortgage loan is a type of secured loan for a property wherein a buyer agrees to put up the home as collateral if he or she fails to make payments to a lender. Mortgages are available for buyers who cannot afford to buy their homes outright. Mortgage loans help buyers break down the total cost of a home into manageable pieces for three to 30 years. Since everyone’s financial situation is unique, it’s best to consult with a lender or broker to determine the appropriate mortgage loan type and term length.
What you should know about mortgage loans:
- They will affect your credit report and are considered part of your credit mix.
- While there are multiple types of loans, you may not qualify for all of them due to your income or military status (e.g. Veteran’s Administration or VA loans are for veterans or current military members/surviving spouses).
- Some loan types will limit the types of homes you can buy (e.g. homes without permits for improvements won’t qualify for an FHA loan).
- You can pay off your mortgage early (pay extra on the principal amount), but keep in mind that you may owe a prepayment penalty.
- All 50 states offer first-time homebuyer assistance programs, some of which do not require you to put any money down.
- The smaller your down payment the more interest you will owe over the loan’s lifespan.
Loan Types
There are four major types of loans, which include conventional, fixed-rate, adjustable-rate, and government-insured. Before you apply for a mortgage preapproval, research your options thoroughly. Understand the differences between each loan type and find out which ones you qualify for.
Mortgage Preapproval
Before you dive into house hunting, you’ll want to get preapproved for a mortgage. Preapproval will help you determine what you can afford, and it will show your lender and seller that you have the funds necessary to proceed with the transaction. The mortgage preapproval process is often straightforward and simple.
Step 1: Call around or meet with lenders in person to discuss current interest rates on the mortgage type you want. When you call, you should be prepared to share your financial situation, including your income, monthly debt, and your credit standing. If you don’t know which mortgage type to choose, ask for help. Conduct an internet search to get an idea of rates in your area. You’ll want to take the time to shop around for the lowest possible rate because it can save you thousands of dollars over the life of the loan.
Step 2: Once you find a lender or multiple lenders, you’ll want to fill out a preapproval application. Provide your assets and liabilities (the minimum you owe in outstanding loans) for anyone applying (e.g. you and a spouse), current employment and annual income, and your estimated down payment amount. Your lender will ask your permission to conduct a credit check on anyone applying for the preapproval.
Step 3: Your mortgage loan officer may need additional info for the lender to process your preapproval. You may need to show evidence of available down payment funds, W-2s, 1099s, etc. to proceed with the preapproval.
Step 4: Once you have your preapproval amount, you can confidently shop for homes knowing what your financial institution is willing to lend you. Make sure the homes you check out are within your budget. Attach your preapproval letter to each offer you make so sellers know you’re serious about buying a home.
Step 5: If anything about your financial situation changes, such as getting a new job or a raise, you should report it to your mortgage loan officer. Your preapproval amount may or may not change.
Mortgage Terms
The duration of your mortgage depends on the type of mortgage you pursue. Here are a few common ranges to expect from a lender:
- Conventional: 10-30 years
- Fixed-rate: 10-30 years
- Adjustable-rate: 3-10 years
- Government-issued: 15-30 years
Understanding the Interest Rate
An interest rate is a fee you pay expressed as a percentage for borrowing money from a financial institution. You’ll pay the interest along with the principal or loan amount every month until the loan is paid off. Your rate depends on several factors, including your loan type and term length.
Finishing the Loan Process
Once the seller accepts your bid, you’ll contact your mortgage loan officer to complete the loan process. Your lender will ask an underwriter to verify your income, employment, assets, liabilities, and property details. The underwriter orders an appraisal to determine if the home’s value matches the amount the lender can offer you.
If everything looks airtight after getting your loan approved and you make it to closing, the final step is to pay your down payment, closing costs, and sign the mortgage paperwork.
The Bottom Line
Getting approved for a mortgage loan requires a solid financial footing and signifies the start of your homeowner’s journey. Although paying a mortgage is a big responsibility, ultimately, it makes it possible for you to build up equity in your new home and save up for other major milestones. As you undergo the loan process, you can rest assured that you have the basics covered and approach the closing table with confidence.
