Introduction to Mortgages

If you are considering buying a home for the first time, there are a lot of issues to consider. With this introduction to mortgages, you will have one less subject to worry about.

Introduction to Mortgages

At first glance, mortgages can be a bit scary and the cause of more than a little stress. Will your application be approved? Can you really afford to commit hundreds of thousands of dollars of debt? Before you get to stressed out, it is important to keep in mind that millions of people have mortgages on their homes, so you should be fine as well.
So, what exactly is a mortgage? A mortgage is simply a loan similar to one you might take out on a new car purchase. The lender agrees to provide you with a lump sum to buy a home in exchange for your agreeing to pay back the borrowed amount pursuant to a payment schedule agreed upon by both of you.

As you might imagine, mortgage lenders are a bit more careful about lending money than credit card companies or auto lenders. The reason is, of course, the amount of money involved. If a lender is going to loan you $300,000 or so for a property, it wants to limit the risk of you defaulting. There are a couple of ways the lender will go about doing so.

The application process for a mortgage is far more detailed than anything else you have ever applied for. The bank is accessing your ability and reliability when it comes to paying back the proposed debt. To make this determination, the lender looks at issues such as your credit score, known as a FICO score, to assess if you have acted responsibly with past debts. The bank also will look at your earnings history and annual income to determine if you have the ability to meet the monthly mortgage payments, pay the property taxes on the property and so on. Once the person evaluating the loan, called an underwriter, makes a determination, you will either be approved or denied the loan.
Once you are approved for a mortgage, you can go ahead and purchase the home in question. As long as you meet all your financial obligations for the loan, to wit, monthly payments, maintain homeowners insurance, pay property taxes and so on, the mortgage will slowly be paid off and you will gain equity in your home. If you default on the loan for any reason, the lender will eventually foreclose on the property and boot you out. This is a disaster, so you want to avoid it whenever possible.

At the end of the day, seeking a mortgage should not intimidate you. Millions have done it successfully. To limit your stress levels, you should get pre-approved for a specific amount prior to shopping for a home. If any problems arise during the application process, you can calmly deal with them instead of panicking because escrow is closing soon.
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