What You Should Know About Mortgage Lending
Mortgages allow homebuyers to purchase a house with money that is not paid upfront. In exchange, the borrower promises to repay the loan plus interest at a specified future date. Like other loans, mortgages are subject to legal and regulatory requirements. Mortgage lenders are able to offer many different types of mortgages to meet the needs and goals of individual homebuyers. These differences are reflected in the costs associated with obtaining a mortgage, which include both the lender’s fees and the borrower’s costs.
In the early years of a mortgage, a large portion of the monthly payment goes toward interest payments, and equity in a property accumulates slowly. The monthly payment, however, gradually shifts to paying down the principal, and in later years a significant amount of each payment is applied to reducing the principal balance.
When determining the amount of a mortgage, would-be borrowers should first consider their income and typical expenses. This will help them understand how much they can comfortably afford and ensure that a mortgage does not exceed their household budget. A pre-approval process with a mortgage lender can be useful in this regard, but it is not a substitute for a comprehensive assessment of a borrower’s finances by a qualified financial professional.
A lender’s fees are based on the size of the mortgage, the type of property and other factors that may affect its risk profile. Lenders are able to charge a variety of fees, including origination, underwriting, loan documentation and escrow services. Mortgage origination fees are usually calculated as a percentage of the loan amount and may also include fees for a credit report, appraisal or title insurance.
The mortgage process begins with a request for loan application from the borrower. The lender will then review the applicant’s financial situation, including bank statements and investment records, tax returns and proof of employment. The lender will also run a credit report to assess the borrower’s creditworthiness and to verify the accuracy of information provided on the application.
Mortgage lending differs from country to country, but several key characteristics are common across markets. These include:
There are a number of additional costs associated with owning a home, such as property taxes, homeowners’ insurance and homeowner association (HOA) fees. These expenses can vary significantly and are often subject to inflation. Our mortgage calculator includes a checkbox that allows you to include these recurring costs and adjusts the calculator’s calculation accordingly.
Default on a mortgage can lead to foreclosure, where the lender seizes and sells the property to pay off the debt. The lender may choose to take over the property through a judicial or non-judicial foreclosure process. If a default does occur, the borrower can negotiate a modification with the lender, resulting in an adjusted interest rate or loan term, or request forbearance from the loan servicer, which is a period of time during which missed payments are not required to be paid. In this case, it is essential to keep track of all written correspondence from the loan servicer and to respond promptly when requested to provide documentation.