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How Do Home Mortgage Loans Work?

Homeownership is a dream for many and understanding how home mortgage loans work is essential to making that dream a reality. In this article, we’ll break down the process of getting a home mortgage loan into 6 easy-to-understand steps.

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6 Steps to Understanding How Home Mortgage Loans Work

Before we jump into the 6 steps, let’s start with defining what a mortgage loan is: a home mortgage loan is a loan that allows individuals to purchase a property and pay down the cost over an extended period of time.

Step 1: Pre-Qualification, Pre-Application, and Application

Pre-Qualification: If you want to see an estimate of the mortgage amount you may be eligible for, you may want to consider pre-qualification. A pre-qualification helps you better understand your borrowing capacity and provides a starting point for your home search. This will help you get your feet under you and develop a relationship with a lender while leaving your credit untouched.

During a pre-qualification, you provide details about your income, employment history, assets, and debts. Based on this information, the mortgage lender can give you a rough estimate of how much you may be able to borrow. Pre-qualification is usually a quick and simple process.

However, it’s important to note that pre-qualification is not a guarantee of loan approval or the final loan terms. To obtain a more accurate assessment of your eligibility, it’s advisable to proceed with a pre-approval or formal loan application.

Pre-Approval: Pre-approval is a more involved and comprehensive step. It requires submitting an official mortgage application and providing documentation to support the information provided, such as pay stubs, tax returns, bank statements, and authorization for a credit check. The mortgage lender then reviews your application, verifies your financial information, and assesses your creditworthiness. Once the mortgage lender completes this process, they can issue a pre-approval letter, which states the loan amount you are approved for, subject to certain conditions, including the property appraisal and other requirements.

Application: To apply for a loan, you’ll need to gather and submit various documents to your mortgage lender. These typically include proof of income, such as pay stubs, W-2 forms, or tax returns, as well as bank statements, and identification documents. 

Additionally, you may be required to provide information about your assets, debts, and credit history. The lender will evaluate these documents and pull your credit report to assess your creditworthiness and determine your eligibility for the loan. 

Once your application is submitted, the lender will review the information and initiate the underwriting process to assess your qualifications for the loan. It’s essential to be prepared, organized, and responsive during the application process to increase the chances of a smooth and efficient loan approval.

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Step 2: Loan Types and Options

Home mortgage loans come in various types, including conventional loans, USDA loans, FHA loans, and VA loans. Each loan type has different requirements, terms, and eligibility criteria. It’s important to research and understand the options available to determine which loan type best suits your needs.

To learn more about mortgage loan types, read What are the Different Types of Mortgage Loans

Step 3: Loan Approval and Terms

Once all the required components of your mortgage application are submitted, the lender will conduct a thorough evaluation of your financial documents, your credit history and property appraisal. This process is known as underwriting. If your situation meets the lender’s criteria, your loan will be approved, and the terms of the loan will be established. This includes the loan amount, interest rate, repayment period (typically 15 to 30 years), and any additional costs or conditions.

Step 4: Down Payment and Closing

Before finalizing the loan, you will need to provide a down payment, which is a percentage of the property’s purchase price. The down payment reduces the loan amount and may impact the interest rate and mortgage insurance requirements. The down payment is generally made in two installments.  The smaller portion is the earnest money, which is the part of the down payment that is included as part of the offer on the home.  The larger portion of the down payment is made at closing. The closing involves signing the necessary legal documents, paying closing costs (which could include fees for appraisal, title search, attorney, and lender services), and transferring ownership of the property.

For more on mortgage closing costs, check out What Are Mortgage Closing Costs?

Step 5: Repayment and Interest

Once the home mortgage loan is closed, you enter what’s known as the repayment phase. This involves making regular monthly mortgage payments, which include principal and interest. The principal payment reduces the outstanding loan balance, while the interest payment compensates the lender for lending you the funds. The interest rate can be fixed or adjustable, depending on the loan terms. If applicable, you may also need to pay mortgage insurance, property taxes, and homeowners insurance, which can be escrowed and included in your monthly payment.

Step 6: Refinancing and Payoff

During the life of the loan, you may have the opportunity to refinance, which involves replacing your existing mortgage with a new one. Refinancing can help lower interest rates, adjust loan terms, or access equity in the home. Additionally, you have the option to make extra payments or pay off the loan early, reducing interest costs and potentially shortening the repayment period.

Putting It All Together

Home mortgage loans provide individuals with the means to achieve their homeownership dreams. By understanding the process of obtaining a mortgage, selecting the right loan type, and managing repayment, you can make informed decisions that align with your financial goals. 

It’s important to work closely with a reputable lender and stay informed about market trends in order to navigate the mortgage landscape successfully. With careful planning and responsible financial management, a home mortgage loan can be a stepping stone towards the home of your dreams and long-term financial security.

Norway Savings Bank MortgageGO

At Norway Savings Bank, we understand every homeowner has unique needs and circumstances. With Norway Savings Bank MortgageGO, you can find a mortgage that’s just right for you. Not only will you get competitive rates, you’ll get a supportive dedicated local mortgage professional that will help you every step of the way and technology that makes applying on the go easy. So let us help you find the right mortgage for you! Check out MortgageGO or contact a mortgage loan officer.