The vast majority of people who are interested in buying a home are not going to be able to pay cash for the home. Even for those who can buy a home in cash, they often would rather take out a loan to avoid pulling money out of their investments where they would have to pay capital gains taxes.
Those who take out a loan to buy a home will apply for something called a mortgage.
Simply put, a mortgage is a loan that someone uses to buy a home. Mortgages are very specific to the real estate industry; however, they are similar to other loans. People borrow money to cover the difference between the down payment and the cost of the house.
Then, they pay back the loan over a specified period of time with interest. For those who are buying a home, it is important to understand the basics of a mortgage.
Qualifying For A Mortgage
First, anyone buying a home has to qualify for a mortgage. Most lenders will have a set of criteria they use to approve someone for a loan. Some of the factors include:
- Many borrowers will have to meet a minimum credit score which lenders see as a reflection of someone’s ability to pay back a loan on time
- Lenders will also need to see that someone has a proof of income (or proof of assets) so that they know the individual can afford to pay back the loan
- Finally, lenders will also want to see what other debts someone is carrying such as a car loan, student loans, or credit card debts
The lender is taking on risk by providing a mortgage to someone. They want to make sure the borrower is going to reliably pay the loan back.
The Terms Of The Mortgage
Once someone has been approved for a loan, they need to figure out what the terms of the mortgage will be. Some of the variables include:
- The length of the loan
- The size of the monthly payments
- The total amount of the loan
- The down payment required for the loan
- The interest rate on the mortgage
- The presence (or absence) of private mortgage insurance, or PMI
It is critical for everyone to talk with an experienced professional to make sure they understand the terms of the mortgage.