What Is a Mortgage?
A mortgage is a loan that’s used to buy real estate (like a home or land) without having to pay the entire purchase price up front. The borrower repays the loan over a number of years, with each payment consisting of both principal and interest. A mortgage is also called a lien on property or a claim on the property, and it gives the lender the right to repossess the property if the borrower doesn’t keep up with payments.
Mortgage lenders evaluate an applicant’s credit score and debt-to-income ratio to determine how much they can afford to borrow. They may also order a credit report and check for errors that could cause an applicant to be disqualified for a mortgage. Some lenders, such as PNC Bank, offer a complete online mortgage application that makes it easy to get started. Others have local branches where borrowers can meet with a loan officer to talk through the application process.
Once the lender approves an applicant, they’ll send them a loan estimate. This document details the costs associated with the mortgage, including the amount borrowed, interest rate, and estimated closing costs. It’s important to review this document carefully before proceeding with the mortgage, as it can change if the borrower decides to alter the terms of the agreement.
The mortgage loan approval process requires that the borrower supply a variety of documents, including paystubs, tax returns, bank statements, and W2 forms. The lender may also require a letter of explanation if the financial information submitted doesn’t match up with what’s shown on other official documents. This type of letter is used to clarify a discrepancy and explain unusual circumstances, like a short-term business venture or medical expenses.
As part of the mortgage approval process, the lender will order a title search to make sure there are no issues with the property’s ownership that would prevent it from being transferred to the new owner. This is an important step since it’s possible that liens from unpaid property taxes or judgments against the borrower can prevent a sale.
If the borrower is approved for a mortgage, they’ll need to sign all of the final loan documents at a closing. This is typically a meeting between the borrower, the seller, and the lender, though some lenders offer remote closings for homebuyers who can’t attend in person.
Besides the money borrowed, mortgages typically include fees charged by the lender and other third parties. Borrowers also have to pay property taxes and homeowner’s insurance, both of which are paid in installments along with the monthly mortgage payments.
Homebuyers should always focus on what they can afford given their other priorities before they start shopping for a home. Getting pre-approved for a mortgage can help narrow the search by letting buyers know how much they can afford from the start. It’s also a good idea to consult with a mortgage broker early on in the process, as they can give advice on which types of loans might be best for the borrower’s needs.