While it may seem like common knowledge, it never hurts to have a refresher on some of the basics of real estate. A mortgage is a loan from a bank or other financial institution used to buy a house or other real estate. It is also commonly referred to as a home loan. The property being purchased is used as collateral on the loan, meaning that if you fail to make your loan payments will repossess the home and it will enter foreclosure. Like any other loan, payments made every month on the mortgage will pay off the principal amount of the loan due every month as well as the interest accrued over the course of the month since your last payment.
Mortgages are what makes it a lot easier to own a house. Since homes are expensive, getting a loan allows people to purchase a home without having to pay cash outright. This serves a dual purpose. First (and most importantly), getting a mortgage allows the homeowner to gain equity in the home. Equity is the amount of the home’s value that you have bought back from the bank with each monthly payment. Learn more here. Second, it is overall cheaper and better for you to buy a home instead of renting. We break down tips for how to break the rent cycle and buy a home here.
What are the steps for getting a mortgage?
There are generally 6 steps in the mortgage process:
- Pre-Approval – Pre-approval is the first step to buying a home. Don’t do anything else without getting pre-approved first. Here is why.
- Find a house and make an offer – Hire a real estate agent to help you search for and make an offer on a home based on your criteria and loan pre-approval amount.
- Apply for a loan – When the offer is accepted, the borrower applies for the mortgage on the house. This application includes financial information about the borrower as well as information about the house they are applying for.
- Process the loan – The lender compiles and verifies information such as financial records, credit score, and home appraisal results.
- Underwriting – The loan officer sends the application to an underwriter, who then determines whether or not the loan should be approved or denied. If the underwriter approves the loan application, it triggers pre-closing, which involves ordering the title insurance and scheduling a closing date. At this point the loan amount is held in escrow.
- Closing – Closing is when you finalize the sale of the home. You sign the dotted line and get your keys. The loan is released from escrow to the seller. At this point, you are a homeowner! Congratulations!