What Is a Mortgage?
A mortgage is a legal agreement whereby the borrower pledges his or her home as collateral for a debt. The lender has a right to take ownership of the property in the event of default on the loan. The lender may also evict the borrower and sell the property to recover the funds. Different countries have their own specific characteristics that define the mortgage market, which may be reinforced by laws, government intervention or prevailing market practice.
When you apply for a mortgage, lenders will want to review your credit and income documentation to evaluate how much you can afford to borrow. This process is known as underwriting. The lender will also order an appraisal to make sure the home you’re buying is worth what you’re borrowing against it. Lenders will only lend you as much as the home is valued at, so if you’re putting down a deposit or earnest money, that amount will be used to cover the gap between purchase price and appraised value of the home.
If you’re approved for a mortgage, you’ll receive a document called a Loan Estimate, which shows all the costs associated with your home loan. This includes the offered loan amount, type, interest rate and all estimated fees. It’s a good idea to shop around and request a Loan Estimate from every lender you’re considering. By law, lenders have three business days to give you this disclosure after you submit a mortgage application.
You pay back the mortgage over a set period of years, with monthly payments that include both principal and interest. In the early years of a mortgage, the payments are weighted more toward interest, but over time you’ll pay more towards the principal and eventually chisel down what you owe on the loan.
Many homebuyers don’t have enough income or credit to pay for a home in cash, so they use a mortgage to finance the purchase. As a condition of receiving the loan, borrowers agree to make regular payments until the mortgage is paid off in full. This is typically accomplished through a series of repayments, sometimes called installment payments, or by a refinance.
Getting a mortgage can seem complicated, but it’s actually fairly simple. The biggest hurdle is proving you’re capable of repaying the loan, so lenders dig into your finances to determine how much house you can afford and what you qualify for in terms of interest rates and other costs.
A lender can require you to provide a variety of financial information, including bank and investment accounts, pay stubs and tax returns. They also typically run a credit report to verify your identity and assess your credit history. Once you’ve gathered this information, you can submit it to one or more lenders for preapproval. This is a process that can take some time and requires additional verification of your income, assets and debts to evaluate how much you’re allowed to borrow. The final step is closing on the mortgage, which can involve signing a lot of paperwork.