Mortgages: How Do They Work?

The coronavirus pandemic impacted the U.S. economy in countless ways, and the real estate industry was no exception. With low inventory and historically low mortgage interest rates, competition for homes across the country was at an all-time high.

At the same time, many American homeowners also took the opportunity to refinance their homes to lock in better interest rates.

Whether you are looking to buy your first home or you have been a homeowner for a long time, the world of mortgages can be downright confusing.

So how do mortgages work, exactly, and what is the process like? Let’s take a dive into the basics of mortgages.

What Is a Mortgage?

A mortgage is a specific type of loan that you can use in order to purchase a home or refinance your property. You might also hear mortgages referred to as “mortgage loans” sometimes.

Taking out a mortgage is a way to finance the purchase of a home without having all of the cash at one time. Buying a house is often the most expensive purchase a person will make, and there are a number of other costs on top of the purchase price. In order to buy a house, there are many additional fees including closing costs, realtor commissions, and so on.

(Have

you paid off your mortgage? Congratulations! Check out this article to learn what to do next.)

How Mortgages Work

When you get a mortgage loan, it means that your lender gives you a specific amount of money in order to purchase a home. You agree that you will pay back your loan over the course of several years plus interest on the loan. Until the mortgage is paid off, you don’t fully own your home.

The interest rate that is charged is determined by two different factors. The first is the current market rates for mortgage interest. The second is the amount of risk the lender believes they are taking on by lending money to you.

Who Are the Parties Involved in a Mortgage?

In every mortgage transaction, there are two parties involved. This is true whether you get a Flagstar mortgage or a US Bank mortgage. These two parties are the borrower and the lender.

Lender

A lender is a financial institution that you are borrowing money from in order to purchase a property. This might be a credit union or a bank. Increasingly, there are online mortgage companies like Newrez that loan people in the form of mortgages.

The first step in the process is to apply for a mortgage. The lender will then review the information you have provided and see if it fits within their standards. Lenders can be quite picky about who they loan money to, and each lender has its own standards of who qualifies as a borrower.

Lenders will look at your finances to determine how risky it is for them to loan you money. This includes your income, assets, credit score, and debt. With this information, they make an educated guess about whether you will be capable of paying back your loan on time.

Borrower

If you are applying for a mortgage, then you are applying to be a borrower. You can apply to be the sole borrower on a loan or you can apply with another individual as a co-buyer. When you apply with additional borrowers, the added income can potentially help you qualify for a home with a higher sticker price.

Maybe you are applying for a primary residential mortgage or perhaps you are purchasing a second home or rental property. Either way, the two parties involved in the process remain the same.

The Mortgage Process

Unless you have the cash upfront to purchase a property, you’ll need to go through the mortgage process in order to become a homeowner. Let’s take a look at the steps to give you a sense of what to expect.

Get Approved

You don’t necessarily have to get approved for a mortgage before shopping for a home, but it’s generally a good idea. This can help you understand how big of a loan you qualify for, meaning that you won’t waste time looking at houses out of your price range.

It’s worth shopping around to find a lender that offers you the best loan terms. Since all lenders have different rubrics for understanding how risky buyers are, the right mortgage company for your friend might not be the best one for you. You can apply at local banks and credit unions as well as online mortgage brokers or national institutions.

Search For a Home and Make an Offer

This is likely the most fun part of the mortgage process, that is until the keys have exchanged hands and you’re finally a homeowner!

You’ll want to work with a real estate agent so that you can find a house that fits your needs. They will also help you with all of the paperwork, details, and negotiations.

Get Final Approval

Once you’ve found your dream home, made an offer, and the seller has accepted it, it’s time to do some more work in terms of financing.

Your lender will verify all of the different details of the mortgage loan. This will include verifying your employment, income, and assets if they weren’t verified as a part of the initial qualification process.

The details of the property will also have to be verified, which includes getting an appraisal in order to confirm both the condition and the value of the home. A title company will also be hired in order to ensure there are no problems with the title.

Close on Your Loan

It’s finally time to become a homeowner! The closing will involve meeting with a real estate professional and a lender in order to complete the transaction.

It’s at this time that you will need to sign your mortgage papers as well as pay your down payment and closing costs.

Understanding the Ins and Outs of Mortgages Can Help You Find the Best Loan For You

Learning about mortgages and how they work most likely isn’t your idea of a good time. However, understanding how the process works can help you make the best decision for your finances when it comes to obtaining a loan. Whether you get a Cenlar mortgage, a Newrez mortgage, a US Bank home mortgage, or a mortgage from another institution entirely, knowing what to expect from the process can help reduce stress around purchasing your home.

Are you looking for more resources about mortgages to help you boost your financial health? If so, check out our library of articles here.

Kelly Brown