Mortgage Guide: Home Loan Basics

For the majority, having a home is part of the American dream. For most American homeowners, getting a mortgage is just one step in getting there. If you're considering homeownership and wondering where to start, you've come to the right place. Here, we'll cover all the mortgage basics, including loan types, mortgage lingo, the home buying process, and more.

A simple definition of a mortgage

Before we dive in, let's talk about some mortgage basics. First of all, what does mortgage mean?

A mortgage, also called a mortgage, is an agreement between you (the borrower) and a mortgage lender to buy or refinance a home without having all the money up front. This agreement gives lenders the legal right to repossess a property if you don't meet the terms of your mortgage, most often by not repaying the money you borrowed plus interest.

Who gets a mortgage?

Most people who buy a home sign up for a mortgage. A mortgage is a necessity if you can't pay the full cost of a home out of pocket.

There are cases where it makes sense to have a mortgage on your home even if you have the money to pay it off. For example, investors sometimes mortgage properties in order to free up funds for other investments.

What is the difference between a loan and a mortgage?

The word “loan” can be used to describe any financial transaction in which one party receives an agreed sum and agrees to repay the money.

A mortgage is defined as a type of loan to pay for real estate. A mortgage is a type of loan, but not all loans are identified as mortgages. Mortgages are identified as secured loans. With a secured loan, the borrower promises a guarantee to the lender in case the lender stops making payments. If we consider the case of a mortgage, the house will be the collateral. If you stop making payments on your mortgage, your lender can take possession of your home, in a process known as foreclosure.

How does a mortgage work?

Once you get a mortgage, your lender assigns you a fixed amount to buy the property. You are committed to repaying your loan — with interest — over a period of several years. The lender's rights to the home continue until the mortgage is fully paid off. Fully amortized loans have an established payment schedule so that the loan is paid off at the end of your term.

The difference between a mortgage and other loans is that if you don't repay the loan, your lender may sell your home to recoup their losses. Compare that to what happens if you don't make credit card payments: you don't have to return things you bought with the credit card, although you may have to pay late fees to update your account in addition to dealing with the negative impacts on your credit score.

How do I get a mortgage?

The mortgage process is fairly simple if you have a regular job, adequate income, and a good credit score.

There are several steps you need to take to become a homeowner, so here's an overview of what you need to do.

Get pre-approved or be ready to show proof of funds

You'll need pre-approval to be taken seriously—by real estate agents and sellers—in today's real estate market.

Pre-approval

It's a good idea to get initial approval from your mortgage lender before you start looking for homes. Getting pre-approved can tell you exactly how much you'll be eligible for so you don't have to waste time shopping for homes that are out of budget. In some very hot seller's markets in the United States, you may not be able to get a realtor to meet with you until you have a pre-approval letter in hand.

There is a difference between pre-qualification and pre-approval. Pre-qualification involves sharing verbal or written estimates of your income and assets with your lender, who may or may not check your credit.You can use our home affordability calculator to get an idea of what you can afford when you start to think about buying a home, but the numbers you use aren't verified, so it won't carry much weight with salespeople or real estate agents. The pre-qualification process means you can't afford when you start thinking about buying a home, but the numbers you use aren't verified, so it won't carry much weight with sellers or real estate agents. mortgage approval, on the other hand, means that the lender has verified your financial information and issued a pre-approval letter to show sellers and agents that you have essentially been approved, waiting only for a determination of the value and condition of the home. When you are ready to make an offer, you attach your pre-approval letter to your offer so that the seller can be confident that you will be able to get a mortgage.

Cash purchases

In many real estate markets, sellers have the luxury of choosing a buyer from several cash offers. This means sellers avoid the uncertainty of waiting for the buyer's mortgage to be approved.

In these situations, buyers should attach a proof of funds letter to their offer so that the seller can be certain that the buyer has the money they need to complete the transaction.

Buy your house and make an offer

Connect with a real estate agent to start viewing homes in your area. You may find that due to high demand and COVID-19 restrictions, many homes can only be viewed online. In fact, the number of online sales during the pandemic has exploded.

In other words, your buyer's agent today is likely to be your eyes and ears like never before. Real estate professionals can help you find the right home, negotiate the price, and manage all the paperwork and details.