When it comes to home buying or renovating, knowledge is power. So we’re tackling a couple simple questions: what is a mortgage? And how do I get one?

Written by Northwest Mortgage

Published on Wed, Apr 13, 2022, Last Updated on Wed, Apr 13, 2022

Spring is here, and the warm weather, pending end of school year, and spring fever has all kinds of people looking to move to a new home, buy a first home, or make renovations to their current home.

But trying to finance any of those things can be a nightmare without building a knowledge base. So let’s start small: people throw around “mortgage” in all kinds of ways, to the point where maybe you feel like you know what it could mean. But what is a mortgage really? What’s it for? And, if you need one, how do you get one?

What is a mortgage?

Basically, a mortgage is a loan. Like any loan, a mortgage involves a lender providing money to a borrower, as long as the borrower agrees to pay that money back (plus interest) over time. But while all mortgages are loans, not all loans are mortgages.

A mortgage is a type of secured loan that’s used exclusively for real estate, like homes, land, and other buildings. A “secured” loan is a kind of loan that needs collateral (something that the lender can sell or repossess in case the borrower can’t completely pay off the loan for some reason) from the borrower before a lender is allowed to release the agreed-upon money.

For a mortgage, the property being bought is the collateral. This means that the lender has certain legal rights to the property until the mortgage (plus interest) is paid off. If the borrower’s payments are not made on time or defaults on the mortgage, the lender can repossess and sell that property to recoup its losses.

How do I get a mortgage?

On the surface, the process seems pretty straightforward: have good credit, have a stable income and be able to prove it, shop for a house, then get a loan for it.

But not everyone fits into that process - there are always special circumstances. Maybe you’re not buying a home, but trying to renovate. Maybe you have the income, but your credit score makes banks hesitate. Maybe you’re a freelancer and your income isn’t always as stable as you’d like, or your work is seasonal. Maybe, in the past, you had to declare bankruptcy. Maybe you’re wanting to try your hand at farming or owning a storefront. For all of these situations, there are different kinds of mortgages.

You can do the research yourself and find out what’s required for each kind of mortgage, whether or not you meet those requirements, and whether or not that mortgage is right for your budget. Then you find a lender who can provide that kind of mortgage and go through their process for pre-approval and approval. But researching all the different kinds, the obscure terminology, and specific requirements can make your head spin! Not to mention dealing with banks or other lenders, the profusion of financial terminology, and sneaky fine-print contracts can lock you into terms that strain - or break! - your budget if you aren’t careful.

Another way to get a mortgage is to go through a mortgage company. Experts at the mortgage company can give you information about the kinds of mortgages that work best for you, given your specific situation. They are well-versed in all kinds of mortgages and what kinds of situations they are designed for. They know which mortgages are designed for first-time homebuyers vs. renovations vs. home builders vs. refinancers. They even have information about mortgages backed by different government bodies (like the US Department of Agriculture (USDA), Federal Housing Finance Agency (FHFA), and the VA), which have special requirements.

No matter what your mortgage needs might be, the Consumer Financial Protection Bureau (CFPB) lists seven things to watch for in your mortgage:

  • The size of the loan
  • The interest rate and any associated points
  • The closing costs of the loan (plus lender’s fees)
  • The Annual Percentage Rate (or APR)
  • The type of interest rate (fixed or adjustable), and whether it can change
  • How long you have to repay the loan (also called the “loan term”)
  • High-risk features, like pre-payment penalties, a balloon clause, interest-only features, or negative amortization

At Northwest Mortgage, we offer you the financial tools to help you make sound financial choices and secure the best mortgage for your needs. Contact us today to get started on the preapproval process!


Sources:

https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-en-99/

https://www.businessinsider.com/personal-finance/types-of-mortgage-loans

https://www.rocketmortgage.com/learn/what-is-a-mortgage

https://www.investopedia.com/terms/m/mortgage.asp


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