Having one’s own house is a dream of almost every individual, be it someone living in the USA, Asia, Europe, or in any other part of the world. However, not everyone’s financial conditions favor the achievement of this dream.
Many people let this dream be a dream, while others take every step they can in order to achieve it. One of the methods utilized by many people is the use of mortgage. Before going into any detail, let’s first look into the definition of the term “mortgage”.
“A mortgage is a loan in which property or real estate is used as collateral.”
Thus, from the above definition, we get to know that mortgage is basically a loan. This loan can be taken from a bank or some financial institution. The bank or the financial institution giving the loan is termed as the lender, whereas the individual getting the loan is known as the borrower.
The amount of the loan corresponds to the value of the desired property. Let’s say if a borrower wants to buy a house worth $200,000.
The lender, depending upon the mortgage package selected by the borrower, pays a loan of, let’s suppose, $160,000, while the remaining percentage of the value of the house, i.e the down payment, is to be paid up front by the borrower.
This earns the borrower ownership to that house, but now, he has to pay off, in installments, the principal amount of the loan (i.e $160,000 in this instance) as well as the interest on it within a specific span of time.
Details like the percentage of the down payment, details of the installments, interest, and the time limit for paying off this loan vary according to the mortgage the borrower chooses.
The process of converting your debt into equity by gradually paying of the principal payments, as well as the interest, is termed as amortization. But as stated above, the property, so bought, is held as a collateral, which means that if the borrower is unable to pay the loan installments or interest due to any reason, then, by the process of foreclosure, he or she loses ownership to that property.
Therefore, one can say that mortgage is a type of secured loan, as the borrower would have to pay off the loan with his property if not with money.
Unlike how simple it seems from the above explanation, the topic of mortgage is very detailed and complex. However, now that you know a little bit about what a mortgage is, let’s proceed to discuss which factors must be kept in mind before actually applying for a mortgage.
Applying Ahead of Time
The approval of mortgages doesn’t occur immediately after application, rather it is a process that takes time. If you spend time searching for a property and apply for mortgage after you’ve found one, then, by the time your application gets approved, the property might be sold to someone else.
So if you’ve already decided to apply for a mortgage, it is advised to apply ahead of time and, while you wait for it to be approved, you’ll have plenty of time to search for the property that meets your liking.
Search for Reliable Lender
People need to understand that there are some lenders who would trick you into applying for a mortgage that “seems” easy to deal with at first but can land you into big trouble after sometime.
To avoid this, ask around to see which lenders seem reliable. You can also take the help of a mortgage broker to not only help you find a lender but also decide which mortgage to apply for.
Details of Property
Don’t shop blindly. If the property you wish to buy isn’t worth the value against which you are requesting a mortgage, then it’s less likely that you’d get anywhere with your application.
If you’re already paying off other loans, it’s better that you take care of them first as it can have a negative impact on your chances of getting your loan approved.
Basically, theres a thing called debt-to-credit ratio. It means how much you owe vs how much you earn. Having a lower debt-to-credit ratio considerably favors one’s chances of getting the mortgage application approved.
A Good Credit Score
“A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual.” (Source: Wikipedia)
Thus, a credit score helps the lender decide if you should be given the loan or not. A good credit score can be built with this guide. It favors you by telling your lender that it’s more likely of you to pay off your debt on time.
A borrower must ensure he has a good record of on time tax payments. It’s like an evaluation of how responsible a person is when it comes to his finances. A clean history paves an easier road to getting your mortgage approved.
Types of Mortgage
You don’t need to know every single thing related to mortgages but it would be foolish to go to your lender without any homework. There are different types of mortgages, for example, interest-only mortgage, fixed rate mortgage, standard variable mortgage, jumbo mortgage and so on.
Fixed rate mortgage are quite popular among people.
However, the mortgage type for a person to choose eventually depends upon the individual’s financial conditions and personal preferences. So it is advised to do some homework into the pros and cons of each, and to seek advice from professionals or get in touch with a mortgage broker before finalizing which deal to choose.
All Applicants are Equally Considered
It is possible for more than one individual to apply for a single mortgage. However, all the factors taken into consideration while issuing a mortgage are applied equally on all the applicants, be it their credit history or credit score.
Mortgages are loans paid off alongwith interest. This raises difficulty for certain people, such as the Muslims for whom the involvement of interest in any transaction is against their religious sentiments. The Muslims, therefore, should look into interest free loans provided by Islamic banks as a substitute for mortgages.
After reading the above stated facts, we come to know that people who wish to apply for mortgages need to ensure that their credit history, the details of the property, the debt-to-credit ratio, all favor the approval of their application.
Also, the borrowers should do their own research into the different mortgage types and offers before making their final decision. Those who cannot request a mortgage due to religious reasons should instead look into loans that conform to the principles laid down by their religion.