What Is a Mortgage?
A mortgage is a legal agreement that allows a buyer to buy a home without paying the full price up front. The lender agrees to lend the buyer money for the home, and the borrower repays the loan plus interest over a set period of time. If the borrower fails to pay back the loan, the lender can foreclose on the property. Mortgages are common among homeowners, but they can also be used to purchase investment properties, second homes or vacant land.
When a borrower applies for a mortgage, the lender checks his or her credit score and credit report. The higher the borrower’s credit score, the lower the borrower’s mortgage rate will be. The lender will also review the borrower’s income and assets to make sure he or she can afford the monthly mortgage payments.
Borrowers can get pre-approved for a mortgage before finding a house, which can help speed up the homebuying process. A pre-approval from a lender typically means that the borrower is approved to borrow up to a certain amount and has been given a mortgage interest rate that he or she can expect to receive for the life of the loan, which usually lasts 30 years.
Mortgage lenders aren’t all the same, and fees and rates can vary greatly from one lender to the next. It’s important to shop around for the best mortgage rate, which can save thousands of dollars over the life of the loan. This can be done easily by getting quotes from several different mortgage lenders or brokers.
In addition to a loan application, borrowers will need to submit tax returns and W-2s for the past two years, bank statements and employer contact information. The lender will then review the application and may require additional documentation for processing the mortgage.
Before a borrower closes on a home, the lender will require him or her to provide homeowner’s insurance coverage. This is to protect the lender’s investment in case of a catastrophe that could reduce the value of the home. Some loans are backed by the Federal Housing Authority, which insures some mortgages, and others are insured by private companies.
A mortgage is a form of debt, but it’s considered “good” debt because it can help the borrower build equity in a home and increase its overall value over time. This, in turn, can provide wealth-building benefits such as tax deductions and asset appreciation. In addition, the regular mortgage payments help build the borrower’s credit, which can be helpful in obtaining future loans and other types of debt. For these reasons, a mortgage is an attractive option for many prospective buyers. It’s not the only way to purchase a home, but it is an important part of most buyers’ financing plans. Historically, the main source of mortgages has been banks and savings and loan associations, but today a growing share of the mortgage market includes nonbank lenders such as Better, loanDepot and Rocket Mortgage.