In today’s tough economy, especially as it relates to real estate, it is a buyer’s market. There are many great deals to be found, and those who are in the market to purchase a home and have the available resources to do so could easily find and fund the home of their dreams.
In most instances, regardless of how low the purchase price of the home, buyers will need to obtain a mortgage in which to finance it. Even with the low interest rates and other perks that are offered by lenders, home purchasers need to understand just exactly what they are getting into in terms of a mortgage – because the decision you make today could essentially affect you for the next 30 years.
How Mortgages Really Work
Legally speaking, a mortgage is defined as the pledging of a property to a lender as security for the payment of a debt that is owed. This is better referred to simply as a loan. Yet for many people, this loan will represent the largest and longest term debt that they will ever borrow.
Similar to other loans, a mortgage will have a certain rate of interest. This interest rate could either be fixed for the entire life of the loan, or it may be adjustable, allowing the rate to rise and fall based on certain market movements or other criteria.
In addition to the repayment of the loan itself for your property purchase, there are typically other costs and fees that are associated with obtaining a mortgage. Some of these include title insurance, prepaid interest (referred to as points), and private mortgage insurance, or PMI. Private mortgage insurance is normally charged to those mortgage borrowers who have put less than a 20 percent down payment on the property. Depending on the mortgage you obtain, there could be additional closing costs as well.
Mortgages also have a set repayment time frame, or term, associated with them. Typically, mortgage terms can run between five and thirty years. In many cases, borrowers obtain mortgages for a 30-year term, thus allowing them to make smaller monthly payments over time.
When you obtain a mortgage, the house or other property that you are purchasing is the collateral for that loan and because of this, if payments are not made on this debt, the mortgage lender may take the property from you in a process known as foreclosure.
Mortgage Lenders versus Mortgage Brokers
When a borrower is looking for a mortgage, they will usually seek the services of a mortgage lender or a mortgage broker. Although these two terms may sound similar, there is a definite difference between the two.
A mortgage lender is the entity that actually loans the funds to the borrower for the purchase of their property. In this case, the lender will perform all of the functions that are necessary to originate and close the loan – including the processing of paperwork, qualifying the borrower, and actually funding and closing the loan.
A mortgage broker differs from a mortgage lender in that a broker will locate potential borrowers and counsel them on a variety of loans that are available from a number of different lenders. When working with a mortgage broker, the borrower can choose to work with any number of lenders, depending upon the loan product that best meets the borrower’s needs.
What To Look For In a Mortgage Company
Choosing the right mortgage company to work with is really a matter of comparing which offers the best loan product for your specific needs. Some of the factors to look for include:
- Interest rate and terms
- Points and other fees that may be charged
- Any special financing needs
- Prepayment penalties
- Total cost of the loan
- Overall customer service
How the Mortgage Application Process Works
Once you have chosen a mortgage lender or broker to work with, you can begin the application process. In large part, your ability to qualify for a mortgage has a great deal to do with the information that is contained in your credit report.
Typically, the mortgage application process follows a set series of steps, including:
- Meeting with the lender and bringing a signed copy of the purchase contract for the property you intend to buy. This contract should contain the purchase price of the property, the amount of down payment you intend to put towards the purchase, and the intended closing date.
- Completing the loan application form. This form will ask for personal information such as employment and income history, amount of savings and / or investments that you posses, creditor information and amount of other debts that you owe, any other property that you have an ownership interest in, and details about the property you are intending to purchase such as its age and full legal description. (If you are purchasing the property with another individual, the loan application will also require this information from that individual as well.)
Information You Should Have Ready
Prior to completing the mortgage application, it is important to have all of the required information ready. This will include:
- Social Security number (as well as the Social Security number of your spouse or other mortgage co-applicant).
- Employment history as well as information on other sources of income you may receive such as rental income, alimony, or royalties.
- Details regarding your personal assets such as bank account numbers and statements (both checking and savings), and retirement savings account statements, along with their current value and information regarding the financial institutions where they are located.
- Information on any debt that you owe such as other mortgages, credit card balances, and personal loans.
What Happens Next?
Once you have completed the mortgage application process, the lender’s processing department will analyze the information and then turn it over to a mortgage underwriter who will essentially make the decision to either approve or reject the loan.
The processing of your loan paperwork could take up to several weeks – or longer – depending upon how long it takes to verify employment, analyze your credit report, and confirm the value and amount of your other assets and debts.
Within three business days of submitting your mortgage application, however, your potential lender is required to provide you with a Good Faith Estimate. This document will show you what the costs associated with the loan will be – such as title insurance and loan origination fees – as well as what the estimated monthly payment on your proposed loan will be.
After the Approval
Once your loan has been approved, you will move towards your closing date. Prior to that time, you may need to make preparations such as compiling the funds for your down payment, securing title services and title insurance for the property, conducting a termite inspection, obtaining homeowners insurance, and taking a final walk-through inspection of the property. Once you have completed all of the necessary requirements, you will be ready to close on your new home.