There are a few things kids dismiss because they consider them as “grown-up stuff.” The financial world is unfortunately stowed away in that category. However, you don’t just wake up in your 20s with all the knowledge of a financial god. It takes a lot of research and reading articles on financial sites such as Live Well to become financially literate. The grown-up world may be daunting, but everyone has to start somewhere. And guides like this is here to help you on your way to being a full-fledged adult. Below in this article, we will cover the Engaging in Mortgage: A Simple Guide to the Mortgage Process.
The Basics
One of the things you have to deal with as an adult is getting a mortgage. But before getting one, you should first understand what it is and why you should get one. A mortgage is a bank loan. You get a mortgage when you want to purchase a home or any large real estate property. When you get a mortgage, there are conditions you need to take note of, like the term period needed to pay off the loan and the interest rate.
Why get a mortgage? Well, real estate is expensive. Very few people in this world have the money to pay the amount in full. A mortgage allows you to pay off your house in installments with interest on top.
However, the house is the property of the bank until you can pay off the mortgage. If you stop paying the mortgage, the bank can foreclose the property. This means that upon foreclosure, the bank now has control over the real estate. They can evict the homeowners from the property and sell the home to make up for losses.
Types of Mortgages
Before applying for a mortgage, you must first learn about the types of mortgages available for you to make the best decision for your situation. Here are five basic mortgages for first-time homeowners
Fixed-Rate Mortgages
As the name implies, the interest rate in this type of mortgage does not change throughout the lending period. The length of time covering the mortgage usually ranges from 15-30 years. Typically, shorter terms have less interest rate since it would be less risk for the lending body.
Adjustable-Rate Mortgage (ARM)
Unlike the fixed-rate mortgage, the interest rate changes throughout the term for the ARM. Changes are scheduled according to a fixed period. For example, your interest rate will stay the same for the first six months. By the end of that period, a new rate will be followed for the next half year, and so on. For a hybrid ARM, there is a fixed rate at the start then fluctuating rates in the succeeding time.
Balloon Mortgage
For this mortgage, there is low payment for the majority of the term. But at the end of the term, the remaining balance has to be paid immediately. It’s quite risky, but it has the benefit of a shorter period that usually lasts 10 years.
Interest-Only Mortgage
As the name implies, this type allows you to pay only the interest for a specified amount of time. But after that, you must pay a larger principal. This would be useful for those who would want to start with a smaller amount due to a lack of funds so they can prepare for bigger payments in the future.
Government-Backed Mortgage
This type of mortgage offers you a safety blanket. In case you can no longer pay for the mortgage and default, the government will be paying for the remainder, covering the loaning body’s losses.
The Mortgage Process
Getting a mortgage isn’t just composed of filling up application forms and getting a stamp of approval. It involves certain steps that you must follow before getting approved. Here’s a simplified guide to help you get that mortgage.
1. Choosing the Right Lender
A mortgage, as with any other loan, is a two-party relationship involving a borrower and a lender. Before you go around and pick a house, you must first obtain a suitable lender for this long-term commitment. You must consider factors such as pricing, services, reputation, etc. Make sure to pick a lender you are confident in and one that you can trust.
2. Credit Check
In this step, the lender will run a credit check and look at your income, assets, and if you have any debt for them to get an estimate on the type and amount of mortgage you are qualified for. This information will help you decide which mortgage is right for you given the available options.
3. Preapproval
Now, it’s time to apply for that mortgage. There’s a lot of paperwork involved in applying for a mortgage. If it’s your first time, it’s best if you go through your application with a professional loan officer to ensure that all the information written down is correct and that you did not miss anything. This is essential since mistakes in the application can cause delays and make the process more difficult. Full details of the application should be discussed with the loan officer but expect to provide the following information: type and terms of the loan, personal information, employment history, income and expenses, assets and liabilities, and declarations, among others.
4. The Offer
Once you’re approved, you can now make an offer for a house. Remember to limit your choices to prices that do not exceed the loan agreement. Also, consider the amount of downpayment you can afford.
Look through your options with a trusted real estate agent and carefully make your pick. Once you’ve found the home you feel is right for you, it’s time to put down an offer for the house and negotiate.
5. Underwriting
This is probably the most tedious part of the mortgage process. This is where the lender will determine whether you can pay back the loan and assess the risk in loaning you money. The underwriter will request you to submit some documents and additional information. The underwriter will be looking at your credit history, home appraisal, property survey, home title, income, employment, debt-to-income ratio, submitted documents, savings, and downpayment. The underwriter will also ensure that the conditions of the loan are met.
6. Closing
Closing is the final step of the mortgage process and involves signing a bunch of documents. Make sure to carefully review the documents before signing. Closing a home also involves paying closing costs, which include the application fee, appraisal fee, attorney fee, and escrow fees, among many others. The costs will vary depending on your loan.
