Mortgage Basics

The Basics of Getting a Mortgage

So, you want to buy a home. Normally, that entails getting a mortgage.

Most of us understand that a mortgage is a type of loan that is repaid over the course of time you own your house, but once the buying process starts, we learn it’s much more involved than all that.

But don’t worry, this article will provide some mortgage basics that will give you a good idea of what to expect on your home buying journey.

What is a Mortgage?

A mortgage is defined as a type of loan you can use to buy or refinance a house. It’s a way of buying a house without having all the cash up front.

Benefits of Getting a Mortgage

A mortgage is good for people who can’t afford to buy their homes outright… aka most people, but it can also be good for those who can. For example, some investors will get a mortgage so they can free up money for other investments.

How Do You Qualify for a Mortgage?

Before being approved for a mortgage, the lender will want to make sure that you meet certain financial requirements.  This includes an income that is high enough to cover the payments on the loan. You will also need a good credit score, typically above 620, and a debt to income ratio of less than 50%.

What’s the Difference Between a Loan and a Mortgage?

Loans are transactions where money is loaned to a borrower. The borrower must pay off these loans over a set course of time, usually with interest rates added.

All mortgages are loans but not all loans are mortgages.

A mortgage is a type of loan used to finance property. They are secured loans. This means the borrower promises collateral to the lender in the event that they default on their loan.

In the case of a mortgage, the collateral is the house. So, if they borrower is unable to make payments, they will lose their house.

How Do Mortgages Work?

In the case of a mortgage, the loan you get from a lender will cover the full value of the house. The loan must be paid back with interest over a specified period of time. The borrower will not fully own their home until the loan is paid off.

The interest rate on a loan is dependent on two factors, the current market rate and the amount of risk the lender is taking in lending you the money. While you can’t control the market rate, the risk the lender is taking will depend on factors like your income, your credit score and your Debt to Income ratio.

It’s a good idea to take any steps you can to improve your credit and DTI before even speaking to a lender about a mortgage.

The amount of money you will be borrowing will depend of what you can afford and the market value of the home which will be determined during an appraisal. The lender can not lend you an amount that is more than the appraised value of the home.

Now that you have some basics under your belt, you are ready to start exploring your options in the home buying process. Good luck finding a property that is right for you.