A mortgage is a type of loan that is used to finance the purchase of property. This might be a single family home, a condo unit, a multi-family dwelling or an investment property. Mortgages are also used on the commercial side to purchase industrial buildings, office space or other types of commercial property.
A mortgage is a secured loan, the loan is secured by property that is being purchased. In the event the borrower can’t repay the mortgage, the lender can use the underlying property to try and recoup the remaining balance on the mortgage.
Buying a home is generally the largest purchase that most people make. Understanding mortgage loans is critical. Getting the right mortgage for your situation can have a big impact on your overall financial situation and can help you make the home of your dreams an affordable reality.
Even under normal conditions, buying a house presents challenges of one sort of another for buyers. Buying a house in 2020 comes with any number of challenges.
One factor has been a dwindling supply of homes in some parts of the country. This stems from a combination of some sellers taking their home off the market and increased demand for homes in many areas. In some cases, sellers may have decided that this isn’t a good time to move, or perhaps they’ve encountered a financial situation that has led to this decision. Due to the pandemic, many families have decided to move out of congested urban areas and into suburban areas. In many cases the lower supply coupled with increased demand has resulted in both higher prices and stiff competition for some properties.
The economic fallout from COVID-19 has impacted the mortgage market in the form of tougher requirements from many lenders. Perhaps having learned from the financial crisis of 2008, many lenders have tightened their lending standards.
These tougher requirements vary by lender, but some examples are:
The bottom line for home buyers is that these tougher requirements may require more shopping to obtain an affordable mortgage.
Choosing the right lender takes a fair amount of research and requires a thorough review of your own situation before you even start your search. For example, if you are a first-time buyer there are some lenders that might be better than others for your situation. Other factors that can help determine the best lender for your situation might include:
In some cases it might make sense to work with a mortgage broker who can help you look across the mortgage lender spectrum and can often help you obtain the best deal. Some online mortgage sites offer access to a number of different lenders, much like a traditional mortgage broker.
A mortgage application is a longer process than most other financial transactions that you might engage in. It’s important to be prepared with the required documents and information before completing the application. This includes:
Additionally the lender will run a credit check on to obtain your credit score. They will also ensure that the property that you are looking to finance is actually worth the amount of the purchase price.
Here are the answers to some commonly asked questions about obtaining a mortgage.
A fixed rate mortgage is based off of a fixed interest rate. This is the rate used to calculate the monthly payments which will remain fixed over the term of the loan. The benefit is certainty about the level of your monthly payment over the life of the loan. With an adjustable rate mortgage (ARM), the interest rate can adjust periodically. Typically the interest rate is fixed for an initial period of time and then adjusts periodically. Sometimes there is a cap on the amount of the adjustment. Often whether the rate adjusts and by how much is based upon some sort of benchmark such as the rate on 1-year Treasury Bills. An ARM might start off with a lower rate than a fixed rate mortgage, but if interest rates rise the interest rate could skyrocket drastically increasing your monthly payment.
The answer depends upon your situation. If you have good credit, have the ability to make the required down payment and have a steady employment history a conventional mortgage might be the best option for you. Conventional loans often carry the best interest rates and terms. An FHA loan might be a good option for those who are not “perfect” applicants. This might include a lower credit score, an inconsistent work history or other blemishes that could deter a lender on a conventional loan. An FHA loan carries a government guarantee which gives the lender a bit more security. If you are a veteran, a VA loan might be a good option for you. Again the government guarantee allows the lender to take a risk on you even if your financial situation doesn’t match up with what might be required for a conventional loan.
When lenders check your credit score it is reflected as a credit inquiry. If you apply for several mortgages within a compressed time frame of 45 days or less these multiple inquires by mortgage lenders will show up as a single credit inquiry .
Generally the mortgage application process
should take about 30 days
. This could end up being longer or shorter. Some online lenders might be able to complete the process in as little as a week. In other cases, especially during peak periods for applications, this process can stretch out a bit longer. Much will also depend upon how prepared you are with the information the lender requires.