What is in mortgage is a loan secured by real estate. A mortgage is your promise to pay back the loan on your home that if not paid back according to the terms of the mortgage will legally force you to forfeit your home to the home loan lender.
You must of course, first qualify for the mortgage in order to buy a home. In order to qualify for the mortgage you must meet or exceed certain criteria established by the home loan lender to prove to them that you are a good credit risk.
The 4 Types of Mortgage Lenders
There are four different types of mortgage lenders. These are: a bank or depository bank, a mortgage loan broker, direct lenders, and mortgage banks.
Bank or Depository Bank
A bank or depository bank can be your local, neighborhood bank, or one of the larger national institutions such as Bank of America, Wells Fargo, Chase Bank, Citi Bank, Credit Unions, and many others.
These banks provide checking accounts, savings accounts, certificates of deposits, or CD’s, money market accounts, and other financial services. In addition to these accounts and services, banks also offer mortgage loans.
Good deals can be had from banks or depository banks if you have good credit, and have a good sized down payment for your home purchase.
Special deals can also be had if you utilize their other services in combination with your home loan. You can often get a relatively low interest rate with a bank, again if you have good credit, and a substantial down payment.
Because these institutions usually have very deep pockets, or large monetary reserves, they are also willing in many cases to grant large or jumbo mortgage loans.
These banks don’t want you to default on your loan, or refinance your loan for a lower rate, so they try to keep your initial interest rate as low as possible.
Closing costs on your home loan with banks are also normally quite reasonable. This is because the banks make money by servicing the loan.
If your credit is not great, and/or you don’t have much for a down payment, you should probably look elsewhere for your home loan other than banks or depository banks.
A mortgage bank is very similar to a bank or a depository bank. The biggest difference is that mortgage banks normally have only one financial product and that product is mortgages.
Because mortgage banks are limited to only providing home loans, they tend to be more forgiving to potential customers that may not have the best credit, or a large down payment.
Mortgage banks are also more willing to go the extra mile to grant loans to folks that may have had challenges or problems obtaining a home loan previously.
In return for this forgiving nature, mortgage banks may charge higher rates, and have more and higher fees than conventional banks, and some other mortgage lenders.
Real estate agents and brokers love mortgage banks because they approve more loans, which allows them to sell more homes and properties.
Direct lenders fund their mortgages directly with their own funds. They are similar to mortgage banks. The direct lender objective is to get the loan closed, and then sell the loan to other investors.
Direct lenders do not service the loan, so in addition to profiting on selling the loan to other investors, they know that these other investors will also service the loan for the customers, taking that responsibility away from them.
Direct lenders are smaller compared to banks, and mortgage banks. As a result they don’t attempt to take on larger loans. Direct lenders are ideal for government loans based on the fact that government loans are more lenient on income requirements, and credit scores, and credit ratings.
Mortgage brokers represent many mortgage lender wholesalers. They have the ability to shop among these wholesalers for the best rates, terms, fees, etc. which allows you the opportunity to get a better deal than you could normally get on your own.
Mortgage brokers are normally paid a fee by these wholesale mortgage lenders when they send business their way. This give you the borrower more flexibility, and more options.
You can usually get the best possible rate with a mortgage broker, and you will not sacrifice servicing of your loan by using a mortgage broker.
Types of Mortgage Loans
The various mortgage lenders offer various types of mortgage loans. The interest rates, and associated fees and charges can vary from one type of mortgage loan to another.
Fixed Rate Mortgage Loan The most common and popular type of mortgage loan is the fixed rate loan.
A fixed rate loan is a loan with one fixed interest rate throughout the entire life or period of the loan, which fixes or locks your mortgage payments at a steady amount.
Among the fixed rate loans, the one most commonly chosen by borrowers is the 30 Year Fixed Rate loan, which has the same interest rate for a 30 year period.
The 15 Year Fixed Rate Loan is the second most popular choice among borrowers. In addition to these mortgage loans, a 50 Year Fixed Rate Loan, a 40 Year Fixed Rate Loan, and a 20 Year Fixed Rate Loan are also available from some lenders.
Some lenders offer all of these fixed rate products, while some offer only certain types of loans with differing loan durations.
Two-step Mortgages: A two step mortgage has two different time periods. The first time period will be at a certain percentage fixed interest rate, and the second time period will be set at a different fixed interest rate.
For example, the first 10 year period of the loan could have a fixed interest rate at say 5%, and the next or second 10 year period may have a fixed rate at say 6%.
Combination Mortgages: Also known as Combo Mortgages, these are mortgages that combine an adjustable rate term, and a fixed rate period. As an example, there are loans where the beginning period is at a fixed rate such as for a 10 year term, and for each year past that the rate becomes adjustable for the remaining time period of the loan.
There may be differing combinations of the fixed term, and for the adjustable term, depending upon the policies the lender has in place.
Adjustable Rate Mortgage, or an ARM, has a floating or varying interest rate. An ARM, can fluctuate, unlike a fixed rate mortgage, depending on changing economic, and market factors, and or based on a certain indicator it is aligned with.
An Adjustable Rate Mortgage’s interest rate is usually quite a bit lower to start than a fixed rate mortgage based on the possibility of it rising in the future.
An ARM is somewhat more risky than a fixed rate loan, and is ideally utilized when the intended duration of home ownership is limited, or relatively short.
Balloon Mortgage: A balloon mortgage will usually have a fixed rate of interest for a certain time period, usually with low monthly payments, and a large balance or balloon that comes due at the end of the loan term.
This can be a risky type of loan, as it is not difficult to get in dire straights when the balloon note comes due, if the borrower has not put away an adequate sum of money to take care of the balloon total.
It may be possible to renegotiate the balloon balance due, into payments with a longer time period, but this will be at the discretion of the lender, and the terms will almost always be of benefit to the lender, and not the homeowner.
What Lenders Look for to Qualify You for a Mortgage
Mortgage lenders look at 5 specific areas to determine if you are worthy to be granted a home loan.
These criteria are:
Home loan lenders need to see a credit score of at least 620. This can vary somewhat from one lender to another, but is a good general rule of thumb.
They will pull up your credit score from the 3 big credit reporting agencies, Trans Union, Experian, and Equifax. The middle score from these 3 credit reporting agencies is taken to be the deciding number.
Mortgage lenders look at a type of debt you have called mandatory debt. This is the monetary balance you may owe as a percentage of how much money you make.
This balance is for monthly credit card payments, monthly car loan payments, lines of credit, child support, property taxes, alimony, plus other mortgages.
Time on Job/Income
Home loan lenders want to see at least 2 years of continuous work experience, and ideally on the same job. And, of course, you need to be employed currently.
The more income you have as it relates to your debt, and of course these other factors, the more home you will qualify for, and the better interest rate you will be offered.
The more down payment that you can put toward your home mortgage, the better. From the vantage point of the home loan lender, this lessens the total amount of the loan, and will make it that much easier for you to repay the amount that was borrowed.
The Home or Property
Although this information is often not known early on in the lender’s preapproval process, it ultimately becomes a factor in order to qualify a borrower.
The mortgage company or lender will want to be sure that the property you want to buy is worth what you are paying for it.
As a result, they will normally order an appraisal to be absolutely certain that the home is worth what is being paid.
Thank you for reading What is in Mortgage. Please feel free to leave your comments, questions, and suggestions below. Please also feel free to share on social media. Good luck with your home loan approval.