What Is A Mortgage? A beginner guide
Owning a house is an essential part of the American dream for many people. For most American homeowners, obtaining a mortgage is crucial in fulfilling this dream.
If you’re considering the idea of buying a home but don’t know where to start, you’ve come to the right place. This guide will cover the basics of mortgages, how a mortgage loan works, the home-buying process, and other important information.
Let’s start by understanding some basic concepts about mortgages. Essentially, a mortgage is a loan agreement between a
borrower and a lender, which is used to either buy or refinance a home.
If you fail to meet the terms of your mortgage, the lender has the legal right to take possession of the property. This could happen if you do not repay the borrowed money along with interest.
Most homebuyers opt for a mortgage since covering the entire cost upfront is often unfeasible.
Sometimes it’s wise to take out a mortgage for your home, even if you can afford to pay for it upfront. For example, investors may use mortgages to free up capital for other investments and benefit from tax advantages.
What’s The Difference Between A Loan And A Mortgage?
The term “loan” refers to a lump sum of borrowed money that must be repaid, typically with interest.
A mortgage is a type of financing used to acquire real estate. It is a “secured” loan, which means that the borrower pledges an asset as collateral to the lender. In the case of a mortgage, the pledged asset is the property itself. If you are unable to make your mortgage payments, the lender is authorized to initiate a process called foreclosure, which allows them to take possession of your home.
With a mortgage, you get a lump sum to buy a home and pay it back with interest over time. The lender has a claim to the property until it’s paid off. A fully amortized loan has a payment plan that repays the loan by the end of the term.
A mortgage is unique because the lender can sell your home if you default. This is different from missing credit card payments, which may result in late fees and impact your credit score.
Obtaining a mortgage is simple when you possess stable employment, sufficient income, and a favorable credit rating.
Becoming a homeowner involves a series of necessary actions. Therefore, here’s an overview of the essential steps you must follow.
1. Pre-approval or proof of funds? Be prepared for a smoother home-buying process.
Get pre-approved before starting your home search. This can help you understand the loan amount you qualify for and prevent you from wasting time exploring properties beyond your budget. In some competitive real estate markets, agents may require a preapproval letter to meet with you.
It’s important to distinguish between prequalification and preapproval. Prequalification involves providing your lender with estimated details about your income and assets, and the lender may or may not conduct a credit check.
When you receive a mortgage preapproval, it means that your financial information has been verified, and a preapproval letter has been issued, signaling to sellers and agents that you have essentially been approved, pending only an assessment of the property’s value and condition.
Attach your pre-approval letter when submitting an offer to assure the seller of your mortgage capability.
Cash transactions are prevalent in real estate, allowing sellers to bypass mortgage approval. Prospective buyers should include a letter verifying their funds to instill the seller’s confidence.
If you’re planning to buy a new home, it’s a good idea to get in touch with a reliable real estate agent in your area. They can assist you in scheduling property viewings and finding open house events to attend in your quest for the perfect home. Alternatively, you can also browse through a multiple listing service (MLS) to check out available properties online. This will help you get an idea of the homes available in your area and narrow down your options before making a decision.
Your assigned buyer’s agent is your main resource when it comes to finding the perfect property for you. Experienced real estate professionals can help you find the most suitable home, negotiate prices, and handle all the complexities of documentation and transaction details.
Once your offer is approved, the sale and financing process continues. Your mortgage provider will review your mortgage-related information, verify the property details through an appraisal and home inspection, and conduct a title examination to ensure no issues can hinder the sale.
Once your loan is officially granted final approval, you will arrange a meeting with your lender and real estate expert to complete the loan process and officially become the owner of the property. During the closing session, you will be responsible for settling your down payment and covering any associated closing expenses while also putting your signature on the mortgage documents.
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It’s important to dedicate time to understanding the complexities of obtaining a mortgage before entering the housing market. Have you adequately prepared yourself for the first stage of your home buying journey? Get started on your mortgage approval today! You can also give us a call at (888) 365 – 8365