Most people don't have enough cash on hand to buy a house, so they borrow money through mortgage loans. In fact, approximately 78% of home sales require mortgages.
You might need a loan if buying a house is your dream, but how do mortgages work? If you've never had one, you probably have questions.
Mortgage loans aren't complicated, but you should know some things before applying for one. This guide will discuss the basic concepts of mortgages and how they work. Continue reading to learn more.
Basic Principles of Mortgage Loans
Taking out a mortgage loan is a tremendous responsibility, as it requires a long-term commitment. People often rent before buying, but it's important to understand the differences between renting and owning.
When you own a house, you pay a mortgage monthly, but you can't get out of the loan without selling your house. Therefore, you're tied to it.
Secondly, homeownership requires the responsibility of repairing and maintaining the property. In other words, you pay the costs of these expenses.
Your mortgage loan comes with terms, including a specified number of payments, interest rate, and payment amount. Your lender will determine your payment amount by factoring in the following things:
- Loan amount
- Loan duration
- Interest rate
You can choose from a 15-year loan or longer, but most people choose 30-year loans. A 30-year loan gives you 30 years to repay the money you borrow.
Each payment decreases your mortgage loan balance but not by the full amount of your payment. So instead, your payment pays for two things.
First, it pays the principal balance of your loan, which is your mortgage balance. Secondly, it covers the interest fees your lender charges for issuing the loan.
You will pay more interest on the loan at first because your loan balance is higher. However, you will pay less interest as you pay down your principal balance.
Your mortgage lender will give you an amortization schedule that shows you the breakdown of principal and interest for your loan.
You have the freedom to pay extra monthly payments to repay the loan faster. You can ask your lender how this works if you have questions.
Various Types of Mortgages
The second thing to understand is there are different types of mortgages. Mortgages come in different forms, yet one type might be better for you than the others.
Here are several types of mortgages you can choose from:
Conventional Loans
A conventional loan meets specific industry standards, making them easy for lenders to sell. However, you might need more money down on a conventional loan and a higher credit score.
VA Loan
The Department of Veterans Affairs is an organization that insures VA loans. However, the VA doesn't issue these loans; lenders do. Anyone with military experience might qualify for a VA loan, and these loans offer benefits.
They have lower down payment requirements and competitive interest rates. However, they require paying a one-time fee to the VA.
FHA Loan
FHA loans are also popular loan options. The Federal Housing Administration insures these loans, which are ideal for first-time homebuyers. They have low down payment requirements and credit score criteria.
You can learn more about home loans and options before choosing one.
Application Process
As you begin understanding how mortgages work, you might have some questions about the application process. Applying for a mortgage takes effort and isn't an overnight process. You can begin by looking for the best bank for mortgages, such as Farmers Bank. Then, when you find the right bank to use, you can ask them how to begin the application process. The bank will discuss the application process and mortgage rates and answer your questions. Additionally, they'll give you an application. You must complete the application and give it to the bank when finished. You must also provide the bank with the documents they ask for, such as your tax returns and pay stubs. Additionally, you must consent to a credit check.
Lenders thoroughly review every detail of a person's application before answering them. During this review, they'll look at several vital things, including the following:
Credit
Lenders must ensure that a person is creditworthy before approving their loan. They do this by analyzing your credit score and comparing it to their standards.
Financial Means for Repayment
Secondly, they will evaluate your income and expenses to ensure you can repay the loan. The primary tool they use is the debt-to-income ratio, which reveals a lot to the lender about a person's repayment abilities.
Steady Income
Finally, they'll examine your job and income to look for several things. The primary thing is that you have a steady job that will continue providing you with the income you need to repay the loan.
Other Expenses You Might Pay With Your Mortgage
If the lender approves your loan, you can go through with a home purchase. Once you close on the home purchase, you must begin repaying your mortgage loan monthly.
Your mortgage loan payment will include principal and interest, but it might also include several other expenses.
First, it might include private mortgage insurance (PMI). If your mortgage loan requires PMI, you will pay this monthly.
Secondly, you might need an escrow account to pay for your home property taxes and insurance. If so, you will pay extra each month to cover these costs.
Learn More About the Mortgage Loan Process
Most people get mortgage loans to buy homes, and you might also need one to make your dream come true. Owning a home is rewarding, and it's a great goal to have.
If you'd like to learn more about mortgages, contact us. At Farmers Bank, we offer mortgages and can help you learn more about our products. Visit our site or call us to learn more.