How Mortgage Loans Work

Unless you’re planning to pay all cash to buy a home, you’ll need help with financing the purchase. There are a number of names that all refer to financing for the purpose of buying real estate which includes mortgage, mortgage loan, home loan, bank loan, etc.

A mortgage loan is a contract that helps you finance the purchase of a house. You and your lender will work together to choose the best mortgage option for you. Then they’ll offer an amortization schedule that outlines payment periods to pay off the loan.

1. A Mortgage Loan Includes:

   • The Loan Amount
   • The Interest Rate
   • The Term (length) of the Loan
   • Deadlines to Repay the Loan with Interest.

2. Types of Mortgage Loans

   • Conventional Loans: These types of loans can be fixed-rate or adjustable-rate. A fixed-rate loan offers stability because it doesn’t change over the lifetime of the mortgage. An adjustable-rate loan depends on an index and a margin. In addition to the type of mortgage rate, you will also need to choose the mortgage term – the length of time that you’ll repay the loan. The mortgage term options are 30, 15, and 10 years. Selecting a longer mortgage term usually means you’ll make more payments and interest.
   • Government-Back Loans: Homebuyers with a small amount of savings but good credit can apply for a home loan from government agencies like the Federal Housing Administration (FHA), the US Department of Veteran Affairs (VA), or the US Department of Agriculture (USDA), among other types of loans.

3. How to Qualify for a Mortgage
   

   Your lender will examine your credit score, debt-to-income ratio, income, and down payment before they determine whether you qualify for a mortgage loan. Therefore, you will need documentation to prove your financial history like W-2s, your bank account information, etc.

4. Before Shopping for A Mortgage

   • Interview at Least 3 Lenders Before Choosing One: You want to get the best deal on a mortgage loan, so interview at least three lenders and compare their services and what they can offer you. If you need a referral to a mortgage broker, we can help you with that.
   • Know Your Credit Score: It plays a major role in getting approved and affects your interest rate. Generally, the higher your credit score is, the lower your interest rate will be. Before you request a credit score, there are 2 types of credit: Soft pull (soft inquiry) or hard pull (hard inquiry). A soft pull will not affect your credit score, and a hard pull will. Your lender will need to perform a hard pull before approving you for a loan, so if you want to review your credit before meeting with a lender be sure you get a soft pull credit report. *
   • Calculate the Amount You Can Afford: Just because a lender says you can spend X amount, doesn’t mean you should. You must also have enough savings to pay for any emergencies like if the water heater unexpectedly breaks. Use an affordability calculator to determine the amount of home you can afford while maintaining enough emergency savings and maintaining your desired lifestyle. You must also consider home insurance, property taxes, and closing costs.

* You can get a free soft pull credit report from financial websites such as creditkarma.com and you are entitled to a yearly free credit report from the big 3 credit agencies at https://www.annualcreditreport.com/index.action.

But a word to the wise, after getting your free report, all three agencies will try and sell you a monthly subscription to their credit report service. You don’t need these, so decline any paid services right now.

Also, there are plenty of other sites that pretend to offer free credit reports, like FreeCreditReport.com. Avoid sites like this!

In addition to the above-mentioned services, many banks offer free credit monitoring, if you have a credit card with them. While not as complete as what you will get directly from Equifax, TransUnion, and Experian – Credit Karma, and Annual Credit Report.com are excellent free sources to obtain and monitor your credit score.

Some of the banks that offer free credit scores include Capital One, Citibank, and Discover.

Conclusion

You did it! You completed our series for home buyers. Woohoo! And guess what? We have loads more info on buying a home, and other real estate related topics. Check out our real estate blog for more. Or maybe it’s time for a nap. That was a lot. 😅

Wait! What? You just found this article randomly? Start from the beginning at The Benefits of Homeownership

Disclaimers

Guthrie Group Homes has no affiliation with CreditKarma and this is not an endorsement of their services.

We are not lawyers, tax accountants, financial advisors, or mortgage lenders. Any information provided in this article should not be relied upon as specific advice and is intended for informational purposes only. Please seek professional advice from your lawyer, CPA, or other licensed financial advisors for your specific needs.

While this information should be helpful, it is not complete. There are many other things to consider regarding mortgage loans and real estate transactions. Be sure to consult your lender and Realtor with any questions you have.

Also, see our Frequently Asked Questions about Real Estate