Curious about buying a home? Here’s a basic rundown of mortgage loans and how they work.
What is a Mortgage Loan?
Most people, even those who are more financially stable than others, usually don’t have enough money on hand to buy a home outright. That’s why mortgages exist. A mortgage is a loan specifically for securing real estate. The homebuyer receives the funds to buy the house from the lender, and in return, they agree to pay back the money over time—usually over 15 or 30 years.
What All is in the Loan?
A mortgage loan has many components: collateral, the principal, taxes, and insurance.
Collateral is a security pledged for the payment of the loan. When you agree to buy a home, you’ll sign a legal document agreeing to pay back the loan amount, the interests, and any additional costs. Your new home will be used as collateral for the debt, meaning if you are unable to repay it, the company can foreclose on your home.
The principal is the total sum of the money you borrowed. More often than not, you must pay a down payment of 20% of the principal in order to secure the loan. However, there are several mortgage financing options where a borrower may be able to put less than 20% down payment on the loan.
Interest is the amount of money the lender charges you to use the loan. This is how lending companies make their profit. The amount of interest you pay on a loan is reflected in the interest rate.
These are the property taxes levied by the governing authority in the area where the property is located. They are often based on a percentage of the value of your home. The money you pay on these taxes is usually put back into the community to build and maintain infrastructure and public services. They are factored into your monthly payments.
You can’t secure a loan without home insurance. Home insurance protects both you and the lenders investment in the event of home damage due to a fire, storm, theft, or some other event. If your home is in a registered flood zone, you may also be required to purchase flood insurance.
How Do You Qualify for a Mortgage Loan?
When you apply for the loan, the underwriter will take a look at your finances to determine if you qualify. Generally, they’ll look at your credit history to see if how likely you are to pay back the money. They’ll also consider how much you can put on a down payment, your debt-to-income ratio, and your assets.
Every mortgage is different and has its own style, and there are many different programs to help match with a borrower’s needs. If you want to learn more about qualifying for a mortgage, visit our Mortgage Loan page, and to get an idea of much you could borrow for a mortgage, check out our mortgage calculator.