A home mortgage, also called a home loan, is a loan to pay a house, condo, apartment or other property. A home mortgage is very different from other types of loans because it is secured (the house is collateral or an asset that the lender can take if you do not pay). It is also a unique loan because you pay it back over a long period of time (sometimes as long as 30 years) and because it has a lower interest rate than most other types of debt (the interest is also tax deductible).
Getting a home mortgage is typically essential to buying a house since few people can afford to pay cash for a home. A home loan can also be considered to be “good debt,” since you are using the money borrowed to buy an asset that (ideally) will go up over time.
While getting a home loan can be essential and a smart financial move, many people are not sure how to go about getting a home loan.
The First Step to Getting a Home Loan
The first step to getting a home loan is to make sure you are ready to qualify for one. This means checking your credit to make sure you have a decent or good credit score. If you don’t, you might not qualify for a loan or, if you do, the interest rate might be very high.
You will also need to have been at your job for at least a year (or two years if you are self employed) and you will need to make enough money to easily afford the mortgage payments along with payments for all of your other debt (mortgage lenders have a specific “debt-to-income” guideline, which means they will not let you money if your total debt payments exceed a certain percent of your income).
Finally, you will need to have some cash set aside, since most mortgage lenders will not allow you to get a home loan unless you can pay for at least 20 percent of the cost of the property you are buying. This means if you are buying a house worth $100,000, you’d need to have $20,000 and the bank would lend you $80,000.
If you believe you are ready to qualify for a home loan based on your income, credit and cash savings, it is time to get pre-approved for a loan. This means you get a lender to look at your information and to decide how much they are willing to lend. You should do this before you start house hunting to make sure you are looking at homes in your price range.
A pre-approval is not a guarantee of a loan, but it is a good indicator that the lender will provide you with a mortgage for the amount you have been preapproved for as long as an in-depth review of your finances shows you to be as qualified as the preapproval process did.
You can get a preapproval from a number of different lenders. Banks and credit unions both offer mortgage loans. You can also work with a professional called a mortgage broker who helps you to find a loan, but there is a fee to do that.
The Home Loan
Once you have found a home and made an offer (contingent on getting financing), you will go through the process of officially getting your loan. Here, a more detailed look will be taken at your finances. The bank will also take a look at the home you are buying to make sure that it is a safe investment for them to give you a mortgage.
The key to this part of the process is that the bank is going to want to do an appraisal on the home. This gives them an idea of what the home is actually worth- which may not be the same as what you paid. The bank will have a certified appraiser look at your property and at comparable properties to see what the property is worth. This will determine how much the bank will lend to you, as they will lend only 80 percent of the appraised value. If the home appraises for less than you are going to pay, you will have to come up with the additional cash.
Once the bank has appraised the home and reviewed your credit information to determine you are able to qualify, you will be approved for the home mortgage. The last step is settlement. At settlement, you’ll pay the closing costs (the cost for the appraisal, the home loan origination fee and any other costs), and you will sign the official mortgage paperwork. You will be given details about your costs and payments. The money will be distributed to the seller and you will have your home loan.