Finance Your Dream Home Today With a Mortgage

October 7, 2022

Finance Your Dream Home Today With a Mortgage

The price of a home is often far greater than the savings of most households. Hence, mortgages allow individuals and families to purchase a home by paying only a small down payment, such as 20% of the purchase price, and obtaining a loan for the balance. The loan is then secured by the value of the property in case the borrower defaults.

What Is a Mortgage?

A mortgage is a loan used to purchase or maintain a home, land, or other real estate types. The borrower agrees to pay the lender over time, typically in regular payments divided into principal and interest. The property then serves as collateral to secure the loan.

A borrower must apply for a mortgage through their preferred lender and ensure that they meet several conditions, including minimum credit scores and down payments. Mortgage applications go through a rigorous underwriting procedure before they reach the closing phase. Mortgage types vary based on the borrower's needs, such as conventional and fixed-rate loans.

How Does a Mortgage Work?

Let's use a residential mortgage example for a personal borrower who approaches their bank to purchase a home. The home costs $200,000, and they must put in a 5% down payment. This means:

  • $10,000 down payment [200,000 * 0.05].
  • $190,000 mortgage [200,000 * 0.95]. This represents a 95% loan-to-value (LTV).
  • The bank will register a lien (sometimes called a "security charge") over the property for the total amount of credit outstanding – in this case, $190,000. This security registration renders the property collateral for the mortgage loan.

But the buyer never actually obtains cash from their bank. Instead, they send the down payment to the financial institution, which, in turn, facilitates the home purchase. 

They do so by advancing funds on the borrower's behalf and working with the various legal representatives to ensure that: [A] the title of the property is transferred from the vendor to the buyer, [B] the lien is correctly registered on behalf of the buyer's bank, and [C] the seller obtains their funds, by way of their financial institution.

Residential vs. Commercial Mortgages

When it comes to mortgages, the typical situation is that a residential property owner wants to purchase a commercial property and thinks the same mortgage rules and criteria apply. But this isn't the case. Financing for a commercial property varies significantly from financing for a residential property. This is because the regulations are different, and for the most part, you are dealing with a different set of lenders. This article will look at the differences between residential and commercial mortgages. 

A crucial difference between being accepted for a commercial mortgage and a residential one is that your income is usually not a consideration. This is because a bank or commercial mortgage lender usually takes a business perspective and believes personal income is not a factor. Instead, lenders think that the property bought from a commercial mortgage should yield enough income to cover repayments of the loan.

Having said this, a lender will take in all the details as they assess you for a loan. They will likely need to look at the big picture. The lender will also want information about the property, such as age, condition, location, purpose, and suitability for your business plan. The mortgage provider will want to know that you at least have some income to cover payments if the commercial property does not provide enough income.  

Important mortgage terminology to know

As you assess your mortgage options, here are some basic terms you may encounter:

  • Amortization: This is described as the process of paying off a loan in installments over time. Part of each payment goes toward the principal or the borrowed amount, while the other portion goes toward interest.
  • APR: The annual percentage rate reflects the cost of borrowing money for a mortgage. The APR includes the loan's interest rate, discount points, and other fees.
  • Conforming: This refers to a conforming loan, a mortgage eligible to be bought by Fannie Mae and Freddie Mac, the GSEs integral to the mortgage market in the U.S. These standards include a minimum credit score and maximum debt-to-income ratio, loan limit, and other requirements. 
  • Down payment: The down payment is the amount of a home's purchase price a homebuyer pays upfront. Buyers generally put down a percentage of the home's value as the down payment, then borrow the rest as a mortgage. 
  • Escrow: An escrow account holds part of a borrower's monthly mortgage payment that covers homeowners insurance premiums and property taxes. 
  • Mortgage servicer: A mortgage servicer is a company that handles your mortgage statements and all day-to-day tasks related to handling your loan after it closes. 
  • Non-conforming: A "non-conforming" mortgage doesn't meet the prerequisites that allow it to be purchased by Fannie Mae and Freddie Mac. 
  • Private mortgage insurance: A PMI is a type of insurance taken out by the lender but generally paid for by the borrower when your loan-to-value (LTV) ratio is greater than 80 percent, so you put down less than 20 percent as a down payment.
  • Promissory note: The promissory note is a legal document that obligates a borrower to reimburse a specified sum of money over a specified period under particular terms. 
  • Underwriting: Underwriting is an essential process in the mortgage industry, and it can significantly impact whether or not a loan is approved. There are several vital steps that lenders take when underwriting a mortgage, and each stage has an important role to play.
The content provided within this website is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply. Mortgage loans may be arranged through third party providers.
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