Learning The Mortgage Process

What exactly is a mortgage? In the most specific term, the mortgage is a document in which the home buyer states the lender will hold a lien on a piece of property until a certain amount of money is paid. Generally speaking, the mortgage applies to both this document and the loan that is used to secure the property.

Once you have decided on a piece of property that you would like to purchase, you then make an application to a lender for a mortgage loan. The lender uses information about your previous payment history, employment history, and income to determine whether or not to approve you for a mortgage loan.

Lenders do not allow home buyers to borrower mortgages loans for free. Instead, the lender charges an interest rate to the borrower. This interest rate can be higher or lower depending on the credit risk the borrower poses. The lender will communicate the total cost of your mortgage to you using an annual percentage rate (APR). The APR is expressed as a percentage and is the cost of your loan per year.

Some home buyers would like a little assurance of the amount of money they will be able to borrower before home shopping. It does, after all, ultimately affect the price of the home that is purchased. Pre-qualification and pre-approval are two processes by which a borrower can be a little more certain about the amount of mortgage loan they can borrow.

It is important to note that pre-qualification and pre-approval are not the same. Pre-qualification provides the buyer with an estimate of the amount of mortgage that can be afforded. To pre-qualify a borrower for a loan, the lender make a decision based on income and debt information provided by the borrower. A pre-qualified amount is still subject to the approval process.

Pre-approval, on the other hand, gives the borrower a more solid figure by which to base his or her home search. Except for the appraisal and title search, the lender completes all the work of a complete approval. This includes credit checks and employment verification.

Know that you are not guaranteed a mortgage loan though either the pre-qualification or pre-approval process.

To approve you for a loan, the lender will require certain documents. This includes W-2’s, income tax returns, pay stubs, child support or alimony, bank statements for all of your accounts, and a copy of your credit report. It is best to start locating and collecting these documents as soon as you know you will be applying for a mortgage loan.

Depending on your lender and the type of mortgage loan you obtain, you will have to pay a down payment. The down payment is the difference between the final sale price of the home and the amount of the mortgage loan. If the down payment on your mortgage loan is less than 20 percent of the price of your home you will have to pay private mortgage insurance, or PMI. This insurance protects the lender in the event that you default on your mortgage loan. You can cancel PMI once you have 20 percent equity in the home.

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