What Is a Mortgage?
Mortgage is a term that’s used frequently in real estate and homebuying conversations. This type of loan uses a property as collateral and entails a promise to pay back the mortgage with interest. It’s also known as a “claim on property,” and the lender can foreclose on the home if you don’t meet your financial obligations.
Getting a mortgage can seem overwhelming, but you can take steps to make the process easier by learning about terms and requirements for this loan. First, understand the basic types of mortgages available and how each one works. Then, you can focus on what’s important when buying a house: finding the right option, features and costs for your situation.
Borrowers typically use a mortgage to buy a home that they would otherwise be unable to afford. The loan pays for a portion of the purchase price of the property and the borrower repays the amount borrowed plus interest over an agreed-upon term, usually 15 or 30 years. Often, the loan requires a down payment of a certain percentage of the property’s value and may require homeowners to have insurance on their home.
The lender reviews the applicant’s ability to repay the mortgage by asking for income verification through W-2s, paychecks and tax returns; debt verification through credit card and other loan balances; and checking employment history. Most lenders also have a minimum credit score requirement. The borrower can choose to have a co-signer on the mortgage, which can increase the amount of the loan that they can qualify for. A co-signer is not a legal owner of the property but shares responsibility for paying the loan if the primary borrower fails to meet their financial obligations.
Before finalizing the loan, the buyer and seller will usually attend a closing where they sign the mortgage documents and make the required payments. During the closing, the borrower will hand over the keys to the house to the seller, and the lender will provide the buyer with the rest of the funds needed for the transaction. The lender may charge a fee for origination or closing services, and property taxes are generally paid through a separate escrow account that’s included in the monthly mortgage payment.
Mortgages can be taken out on single-family homes, multi-family homes, condominiums or investment properties. Each type comes with its own set of guidelines for qualifying and a different way that the lender assesses risk. For example, lenders tend to view second homes — such as vacation homes on the beach or cabins in the mountains — as higher-risk and may require more rigorous criteria to qualify for a mortgage. Likewise, investment property mortgages, which are intended to generate rental income, generally have higher standards, including credit scores, down payment requirements and cash reserves. Having the right mortgage for your situation can help you achieve your home ownership goals faster and with less stress. To get started, talk to a loan officer about the mortgage options available to you.