Buying a home can be both an amazing and stressful process at the same time. But tackling the huge expense of a home in one fell swoop is often difficult for an individual or family to handle. That’s where mortgages come in. Typically in exchange for a down payment, a lender will grant you a mortgage loan to allow you to finance your home with an interest rate attached.What Is a Mortgage?
A mortgage is a loan banks and private lenders issue to both individuals and businesses looking to purchase property. Similar to other types of loans, mortgages require monthly payments a process called amortization whereby you reduce the debt you owe over time. The interest rate you receive will be largely dependent on your credit score, as well as the size of your initial down payment. Additionally, if you stop paying your mortgage, the lender can foreclose on your home.
Here’s a breakdown of the main parts of a mortgage:
Once you’ve found your ideal home, you’ll have to complete a mortgage application in order to qualify for a loan. The application process asks questions about factors like your estimated down payment amount, employment, annual income, credit score, assets and debt. This helps the lender determine the maximum loan amount you can receive and the conditions under which you’ll receive it.Types of Mortgages
A fixed-rate mortgage requires the borrower to pay the same interest rate throughout the duration of the loan. Because of this, homebuyers will be able to avoid fluctuating market trends. For the most part, this style of mortgage comes with either a 15- or 30-year term. Some lenders may have proprietary terms, though.
Conversely, ARMs start with a fixed interest rate initially, but this changes after a set period of time. Then, depending on market adjustments, your rate will alter usually on an annual basis. That makes ARMs significantly more unpredictable than their fixed-rate counterpart. Here are a couple examples of ARMs:
Aside from standard mortgage types, government agencies offer their own loans to homebuyers. Three key government agencies provide these services: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affairs (VA).
Jumbo loans are non-conforming mortgages. This means that they don’t fall within the maximum conforming loan limits government agencies set. More specifically, loans for single-family homes are capped at $453,100. If your mortgage goes beyond those bounds, you need to apply for a jumbo loan.Where Can I Get a Mortgage?
If you’re prepared to make the jump into homeownership, you’ll likely need to get a mortgage. Take a look below at the various methods you can use to get a loan to buy your home:
Mortgage bankers are the primary route that most Americans will take when seeking out a mortgage. There’s a wide range of companies that fit under this heading, including banks, credit unions and online lenders, like Rocket Mortgage and SoFi.
These lenders can then be split into two subcategories: retail lenders and direct lenders. The only essential difference between them is that retail lenders offer financial products beyond just mortgages, while direct lenders specialize in mortgages. In other words, a retail lender might have deposit accounts, investing accounts and car loans, whereas a direct lender would not.
Contrary to the large-scale approach utilized by mortgage bankers, portfolio lenders lend their own money by their own rules. This could be beneficial, as these lenders aren’t bound by the same strict regulations and investor interests that mortgage bankers often are. If you need a jumbo loan, it might be easier to get one through a portfolio lender.
Hard Money Lenders
Hard money lenders are typically the last chance for homebuyers that can’t seem to qualify with either a mortgage banker or a portfolio lender. Mortgages from these lenders tend to have high interest rates and minimum down payments, though. As a result, investors looking to fix and flip properties on a short-term basis are their most common customers.
Like their name indicates, wholesale lenders provide funding loans to banks, mortgage brokers and other outside lenders. This means that wholesalers do not work directly with homebuyers, but rather they help to facilitate the entire mortgage process on the back-end. In many cases, you’ll see the name of the wholesale lender listed on your mortgage paperwork rather than your broker.
Once your mortgage is complete, a correspondent lender will look to sell it to a sponsor, which is an external investor. In order to purchase a loan, sponsors must ensure that it meets their criteria. Many times the buyer will end up being either Fannie Mae or Freddie Mac. By selling the mortgages, correspondent lenders are basically guaranteeing they make money, as the chance that a homebuyer defaults is eliminated.Bottom Line
Mortgages can be really helpful if you want to buy a house and can’t afford the total price upfront. Though the types of lenders that offer them vary, it’s ultimately up to you to decide whether a specific mortgage, or lender, is for you. In turn, it’s imperative that you scour the market so you can be sure whatever loan you settle on is the best choice.Tips to Save for a Home
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