For most people, buying a home is an important life milestone — and a rather pricey one. Since such a small percentage of Americans can afford to pay for a house in cash (i.e., upfront and in full), the majority of prospective buyers need to apply for a mortgage.
A mortgage, of course, is a loan specifically designed for buying or refinancing a home and other real estate purchases. The process is thorough, as applicants are assessed on several financial components, including (but not limited to): credit rating, credit history, debt-to-income ratio, and employment status, as well as other factors that help determine a borrower’s ability to repay.
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Yep, a mortgage is not your typical loan. Nonetheless, being informed on the process is crucial when it comes to finding the right lender and knowing what is required from applying to closing and everything in between. (Not to mention once the actual mortgage payments start getting collected.)
Here is what every future homeowner needs to know about taking out a mortgage.
The Application Process
Like with any loan, a prospective borrower must be approved for a mortgage after an in-depth review process. And as stated above, a lot goes into determining and underwriting a mortgage, mainly due to the high cost of buying a home and financial risk a lender takes on. As a result, applicants will want to ensure all of their financial records are in order, and that they meet the requirements for the specific type of mortgage they seek.
Typically, an applicant will apply for a conventional fixed-rate mortgage with a 30-year term. With this option, borrowers repay their mortgage at a fixed interest rate that does not change over the life of the loan. There are other options (e.g., adjustable-rate, jumbo, interest-only), but for applicants who do not meet the requirements for a conventional mortgage, there are government-loan programs available for moderate-to-low income borrowers, veterans, and underserved rural areas.
Of course, applying is about more than just getting approved. It also involves comparing lenders and finding the right option based on numerous factors, from the consumer’s credit profile, to the type of mortgage, to the home itself. Applicants are able to get pre-approved (or pre-qualified) for a mortgage in some instances, which provides an initial indication of approval based on financials submitted to the lender.
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Closing the Deal
Once approved for a mortgage to buy a home, there are several other checkpoints a borrower must go through to finalize the process. First off, a down payment is typically required, in the range of 3% to 20% of the purchase price. The deposit (ultimately toward the down payment is normally placed into an escrow account, where it remains until the purchase of the home officially closes.
At the same time, both the borrower and lender will need to perform their due diligence on the property itself. It’s common for a prospective buyer to order an inspection, especially for an existing home, to address any unforeseen issues with the house before closing. At the same time, the lender will require an appraisal of the property to ensure its value, as well as a title search to ensure there are no outstanding liens.
Finally, a borrower should be prepared to purchase homeowner’s insurance, as lenders require proof of such before final approval on a mortgage. Once all these boxes are checked, along with any other necessary documents or prerequisites, the borrower can officially close on the deal.
Taking out a mortgage may seem complicated, but the process is pretty straightforward as long as you know the pertinent details ahead of time. It’s important to know what you need to apply (and ultimately get approved) for a mortgage, along with all the other requirements and tasks along the way. When you’re looking for the right lender or offer, Fiona is a great option to see where you stand in the mortgage application process.