Home financing is a vital consideration for any aspiring home buyer. For most home buyers seeking home financing, banks are the top lenders available. Loans made to home buyers are long-term and structured in the form of a mortgage loan. A mortgage loan allows a home buyer to secure a loan to buy a home by using it as collateral for the loan. The home remains a lien against the loan until it is fully paid.

Home mortgage loans require a home buyer to enter into a binding agreement with a lender within specific terms for repayment of the loan. Failure to repay the loan results in confiscation of the property. However, as long the loan payments are made on time, the homeowner reserves ownership of the property but cannot sell it until they have paid off the mortgage.

💲 What is a Home Mortgage Loan?

A home mortgage loan is a type of a loan that is secured by real property owned by a borrower that they grant the lender security against the loan. The borrower enters into a legally binding agreement with a lender in which they are credited with cash up front to pay for a home and then pay it back over a specified period. Although the borrower possesses the home, it is the lender who owns it until the loan is fully cleared.

The home mortgage loan is paid back in monthly installments that account for the principal amount and interest, which is the cost of borrowing the principal. The monthly installments include taxes, insurance costs, the principal, and interest. The property insurance is meant to protect the lender from losses in the event of a disaster or a default. However, there are two types of mortgage insurance; namely, property mortgage insurance (PMI)-which protects the lender from defaults- and hazard insurance that protects both the lender and borrower from losses in case of a hazard.

You may be exempt from PMI if you make a 20% down payment on your real property. Also, if you make your monthly installments on time, you are qualified to be PMI exempt once you have paid at least half of the mortgage loan.

📝 Different Types of Mortgage Loans

There are mainly two types of mortgage loans, namely, fixed rate mortgages and adjustable rate mortgages. Each type of mortgage has its advantages and disadvantages, but either of them may suit you depending on your financial status.

Variable vs. Fixed Rate Mortgages

  • Adjustable-rate mortgage loans: An adjustable mortgage loan is structured to allow you to pay back the principal amount in varying interest rates over the duration of the loan. The interest rate may go up or low depending on the progress you have made on the payment or in case you revise the terms of the loan with the lender. Also, adjustable-rate mortgages experience interest rate revisions as the market forces of supply and demand dictate.
  • Fixed–rate mortgage loans: Fixed-rate mortgage loans are issued with a low interest at the beginning, and then, it is adjusted after a predetermined period, usually five years depending on the mortgage market indexes. Thus, a borrower enjoys low initial payments and takes on higher interest rates payments later. However, the increase in the interest rate is capped to prevent inflation of the mortgage loan.

🤔 How to Apply for a Home Mortgage Loan

Applying for a mortgage loan is relatively similar to apply for any other loan. The first step is to acquire a copy of your credit report and ascertain that it is correct. Next, you will need to present your prospective lender- the bank- with the information on the type of home you desire and its cost. Once the bank has this information, they will source for an appraisal of the property to determine the value of the property and proceed to sign you up for the mortgage loan.

Next, will be required to present the following information:

  • Your bank information details: name, account number, address, and a bank statement
  • Three months report on investments you have made
    • Tax returns
    • Debt status
    • Proof of employment and your source of income

✍️ Getting Pre-Approved for a Mortgage Loan

Getting pre-approved for a loan requires serving the lender with information about your financial ability for them to approve a specific amount of money in a set period, usually 3 months. Getting pre-approved is as simple as providing your prospective lender with documentation to prove your income, assets, and credit status.

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