What is Mortgage?

We think we know it. But yet we don’t, at least not completely. Mortgage is one such often used home buying term.

To be exact the term mortgage specifically refers to the document in which the home buyer expresses his compliance to the fact that the lender will hold a lien on the property (home) until a certain agreed amount of money is paid by the buyer.

There is also another meaning for the term mortgage. It is the loan that is used to secure the property. This is the most commonly referred meaning of mortgage.

The Mortgage Process
Mortgage can be easily termed the most tedious process of the entire home buying transaction. Once you have decided which home to buy, you make an application to a lender for a mortgage loan. Now it is up to the lender whether to approve or disapprove your mortgage loan application. The home buying lender then considers several factors like your credit history, employment history, income, debt etc. to decide whether to approve your mortgage loan.

Lenders are wise and in business to make money. So they don’t give you mortgage loans just for free. They charge you an interest for the home loan they give to you. The interest rate that you (buyer) pay depends largely on your credit history and the credit risk you pose.

The total cost of your mortgage loan is usually expressed as a percentage termed APR-Annual Percentage Rate. The APR expressed by the lender refers to the cost of your loan per year.

Getting the Pre-Approval

Before finally approving your mortgage loan and releasing the funds you may ask the lender to pre-approve your mortgage loan. Getting pre-approval will give you an idea on how much home loan you can borrow from your lender. This will help you with a price range of the homes for which you can shop around. Pre qualification is yet another process that normally precedes the pre-approval done by the lender to decide on your mortgage loan.

Pre-qualification is different from pre-approval. Pre-qualification is an estimate of the amount of mortgage loan that you can afford. The lender makes this estimate based on your income and debt information. Pre-qualification is just an estimate. It need not necessitate a final approval. Pre-qualification is just an estimate and is subject to pre-approval.

Only on pre-approval by the lender, the buyer can get an idea of the exact amount he may get as mortgage loan. This will help your home shopping process. At the pre-approval stage, the lender completes the appraisal and title search as well. In effect he completes all works of an approval including employment verification and credit checks.

But neither pre-qualification nor pre-approval guarantees you a final approval and releasing of funds from your lender.

Mortgage Loan Approval
The lender requires certain documents including W-2’s, pay stubs, income tax returns, bank statements of all your accounts, child support or alimony and a copy of your credit report to decide on whether to approve you a mortgage loan. It is advisable on your part to start collecting these documents just as soon as you decided to apply for mortgage loan.

Down Payment
The down payment you have to pay depends on the lender and the type of your mortgage loan. The down payment is completely different from the final agreed sale price of the home and the approved mortgage loan amount. If the down payment is less than 20% of the home price then you have to pay private mortgage insurance, PMI. This will protect your lender in case you default on your mortgage loan.

PMI can be cancelled once you acquire 20% equity in the home.