What is a mortgage loan, do I qualify, and if so how do I get one?
Buying your first home is exciting, exhilarating, empowering, and yes, sometimes a little scary. It’s likely the biggest purchase you’ll ever make, and the daunting task of pulling together the right amount of money to buy your first home might make you want to shy away from the experience altogether. Fortunately, in today’s market, banks and lenders understand that a majority of home buyers won’t be paying cash for their new homes: most home buyers in today’s market take out a home loan (a mortgage) to make their dream a reality. It’s incredibly common, and there are a lot of different loan options available, but it’s important to understand exactly what you’re getting into, what’s expected, and what your big picture finances will look like with this loan in place. So:
What is a mortgage loan?
A loan secured by property or real estate is a mortgage loan. The homebuyer will likely pay a small down payment on the home – the remainder of the purchase price will be paid for by a bank or mortgage lender. In exchange, the lender will get the promise of repayment by the buyer within a certain time frame and with a pre-determined yearly rate of interest (often referred to as APR). The mortgage is legally binding. Further, it gives the lender the right to have a legal claim against the borrower’s home if the borrower defaults on their loan in any way. Until the home is entirely paid off, the buyer owns and occupies it, but legal right to reclaim in the face of default resides with the bank or lender.
Repaying your mortgage
Sound scary? It’s really not. Your monthly loan payment should be a top priority among your bill paying: as long as you make your payments timely every month, you won’t default (most home buyers don’t). So, what does repaying your mortgage look like? Typically, repayment of your loan occurs in monthly payments. Included in that payment will be property taxes, hazard insurance, interest, and the principal of the loan. If your down payment was less than 20% (and there are many loan options available that you can choose from where down payment is 10%, 3.5%, or even 0%!) you’ll also be paying PMI (that’s Property Mortgage Insurance). PMI is insurance for the lender: in the event that you default, PMI ensures that the lender is not left high and dry. Once you’re LTV (loan to value) is less than 80%, you can request to stop PMI payments – enough value will be in the home at this point that the insurance is no longer needed.
How do I Qualify?
So, do these monthly mortgage payments seem doable for you and your family? If so, let’s talk about qualifying! It’s easy to apply for a loan – you can do it through a traditional brick-and-mortar bank, a credit union, mortgage lender, or even use a mortgage broker (though they sometimes charge extra fees). These lenders will conduct a thorough inspection of your household finances: what does your credit score look like, what other debts do you have, what is your household income, your total net worth, assets, the size of the down payment you want to pursue, and other important financial tidbits to paint a full picture of who you are. Lenders are trying to assess: is this the financial picture of a person who can adequately pay back this loan in the time allotted without major risk of default?
If your lender gives you the green light (you are approved and good to go!) the next step is an appraisal of the home – here, the lender is ensuring that the purchase price of the home accurately reflects the real value that you’re getting (this is important for the lender: banks won’t want to loan you 500,000 dollars to buy a home with an appraised value of only 250,000). You the buyer will be expected to pay for the appraisal: you’ll also pay for loan origination fees and miscellaneous taxes and filing fees; you’ll do this when you sit down to sign the loan agreement. Loans typically take about 30 days from application to final signature: there’s a lot of paperwork and investigation that lenders need to go through to make sure they have their ducks in a row and that all parties are entering into a fair and equitable deal. But once you sign, the home is yours! Keep up with your monthly payments, and soon you’ll have a fully bought and paid-for home that’s all yours.
Taking on a home loan is not a small decision, but there are a lot of resources out there to help you move forward and make a financial decision that will be right for your family. Check here or here for more information about loans, or you can sit down and talk to the mortgage lender at your local bank before applying to find out what options are available to you. And good luck! It’s a big decision, but ultimately getting a home loan for your first home is one of the biggest steps most families take towards true domestic bliss!
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