If you plan to buy a home and don’t have the cash to pay for it outright, then you need a mortgage. Lenders define mortgage as the money you borrow to pay for real estate. Whether you’re getting your first mortgage or want to refinance the loan you have, you can find specific mortgage assistance through a mortgage loan originator or industry manuals like the Mortgage Market Guide. To get you started, here are the basics.
How Does a Mortgage Work?
When you get a mortgage, the lender pays the seller for your new home, and you agree to repay the money you borrowed over a period of time, say 10, 15 or 30 years. Each month, you make a payment to the lender. A portion of the payment, called principal, goes toward the actual amount you borrowed. The rest goes toward interest and an escrow account to cover the cost of your property taxes and insurance. After making your last payment, you officially own the home.
How to Get a Mortgage
You start the mortgage process by applying at a bank, credit union or mortgage broker. The lender reviews your application to determine if you are credit worthy and won’t need mortgage help during the term of the loan. During this review, they look at your credit report, income and down payment.
Getting a Mortgage
The lender uses your financial information to set mortgage terms, including the interest on the loan and mortgage APR. If a friend or family member plans to give you money for your down payment, then you need to give the lender a gift letter for mortgage, in which the person giving you the money states that he or she does not expect any payment in return for the gift.
How to Get Approved for a Mortgage
Qualifying for a mortgage requires proving to the lender that you have the ability to pay back what you borrow. You can increase your chances of approval by reducing your debt-to-income ratio, paying your existing bills on time and choosing a home you can afford.
Types of Mortgages
When you start looking at mortgage options, you discover the variety of mortgage solutions that lenders offer, each with its own set of mortgage requirements. Understanding how these mortgages work helps you choose one that meets your needs.
A standard mortgage is what most people think of when they imagine a mortgage. It applies to a single piece of property and may be conventional or FHA backed. You repay the loan in monthly payments that include interest.
Land developers sometimes use blanket mortgages when they buy large pieces of land they plan to subdivide. Homeowners sometimes choose blanket mortgages when they want to sell their existing home after building a new one and need a mortgage for both properties. This mortgage lets them sell part of the property without refinancing the remaining sections.
Wrap Around Mortgage
A wrap around mortgage is a form of seller financing. Instead of getting a loan from the bank, the buyer makes payments to the seller who then pays the bank that holds the original mortgage. This arrangement gives people with poor credit the ability to buy a home and provides sellers more potential buyers.
If you want to buy an office building, warehouse or apartment building, then apply for a commercial mortgage. Unlike residential mortgages backed by the government, commercial loans are riskier and have stricter requirements for approval.
10 Down Mortgage
Some lenders require buyers to pay 10% of the property’s sale price upfront as a down payment. The lender then issues a loan for the remaining 90%.
3 Down Mortgage
A 3% down mortgage requires a minimal down payment and is reserved for buyers with excellent credit. With this type of mortgage, the lender fronts 97% of the home’s selling price.
5 Down Mortgage
Another option is a 5% down payment. You then get a loan to cover the other 95% you need to pay for the home.
What Is the Difference Between a Mortgage and a Mortgage Note?
When a bank agrees to give you a mortgage, it provides a written description of the terms of the loan, including the loan amount, interest rate, due dates and charges for late payments. This document is called a mortgage note.
What Is a Mortgage Broker?
A mortgage broker works with the buyer and the lender during the approval process. The broker collects financial information from the buyer to determine mortgage qualification and passes the information to the lender. A mortgage broker can also issue you a mortgage credit certificate that reduces your tax liability and makes the cost of purchasing the home more affordable.
What Are Mortgage Points?
Mortgage points are fees the lender charges to lower the interest rate on the loan (discount points) or cover costs related to the loan (origination points). Some mortgage points are tax deductible.
Mortgage modification programs like HARP help homeowners who can no longer make their payments and do not qualify for refinancing. A loan modification alters the terms of the loan, resulting in lower payments. It commonly includes one of the following:
- Term extension
- Interest rate reduction
- Loan type change
- Re-amortization to include unpaid payments
If a lender needs to borrow money from another organization, then it can use the mortgages it carries to secure the loan. This loan is a mortgage bond secured by real estate.
When you are unable to pay your mortgage payments because of a temporary hardship, you can ask your lender for a mortgage forbearance, which suspends your payments for a set period of time. When you start making payments again, the lender adds the missed payments to your regular monthly payment until you pay back what you missed.
Laws and Rules
The federal government regulates the mortgage industry to protect consumers from potentially dangerous loan products. Before you start applying for a mortgage, take some time to learn about new mortgage rules that affect everything from qualification requirements to loan terms.
Home Mortgage Disclosure Act
Congress enacted the Home Mortgage Disclosure Act in 1975 in response to complaints that lenders refused to give mortgages for properties located in certain urban areas. The law requires lenders to inform the public about the mortgages they fund.
Mortgage After Bankruptcy
If you file for bankruptcy, then you cannot get another mortgage until after the bankruptcy is discharged. You can apply for a FHA mortgage one year after filing chapter 13 or two years after filing chapter 7. Some banks require a three-year waiting period.
Mortgage Servicing Rights
Your mortgage servicer is the company that has the legal right to accept and process your mortgage payments. This may be the same lender that funded your loan, or it may be a company that bought mortgage servicing rights from your lender.
Mortgage Underwriting Process
During the underwriting process, the lender assesses your ability to pay back the loan. The underwriter carefully reviews your income, debt-to-income ratio, credit history and the value of the home you want to finance. The lender uses this information to decide whether or not to give you the loan.
Credit Score Needed for Mortgage
Although a favorable credit score gives you better loan terms, there are mortgages for poor credit. If your score falls below 580 and you put 10% down, then you can qualify for a FHA loan. You can take steps to better your credit score by paying your bills on time and paying down your credit card debt to lower your debt-to-income ratio.
Mortgage Broker vs. Bank
Knowing the difference between a mortgage broker and a bank helps you choose the right one for your situation. A mortgage broker acts as a middleman between you and the lender, collecting your financial information, presenting it to several lenders and culling a list of lenders willing to work with you. This means you don’t have to apply to each bank individually. If you choose to go through a mortgage broker, then note the fees they charge for the service, and factor that in to the overall home buying cost.