As someone who wants to buy a home someday, you’re probably very familiar with the concept of a mortgage.
Basically, a mortgage is a loan you get from a bank to buy a house when you don’t have the necessary cash in hand to pay for the whole thing all at once.
This is quite handy, especially considering that the average price of a home on the market in the United States today is pretty close to $430,000.
With that being said, a lot of people aren’t quite sure how mortgages work.
Of course, there are a lot of different types of mortgages—and there are many different financial institutions that manage them.
For example, TIAA loans help teachers, doctors, and professionals in other specific fields of work to get great, affordable home loans that allow them to become homeowners.
But how do mortgages work?
Well, in this blog post, we’re going to walk you through it and explain it.
Let’s dive in.
Table of Contents
The Definition Of A Mortgage
The actual technical definition of the word ‘mortgage’ is that it’s an agreement between a borrower and a mortgage lender to either buy or refinance a home without having all of the cash available upfront.
So, the first step in this process (for you, as a prospective home buyer) is to apply for a mortgage loan.
When you apply for a mortgage loan, you basically go to the bank and say:
“Hey, I want to buy a house. Can I get approved for a loan based on my income, credit score, and financial situation? And if so, how much can I get approved for?”
Since mortgages are a specific type of loan that’s used to finance a property, the bank takes a look at your financial situation, including your income, your credit score, etc. to determine whether or not you can qualify for a loan—and if so, how much you qualify for.
That’s how you get pre-approved (which, for most people, is a necessary step in the home-buying process).
How Do You Get A Mortgage?
In order to be taken seriously by real estate agents and sellers during the home-shopping process, you’ll need to get pre-approved for a mortgage before you go hunting for a house.
Pre-approval will basically be displayed on a sheet of paper, showing the realtor that you have indeed been pre-approved by a financial institution for a mortgage loan of up to a certain amount.
Then, you go looking for a home that falls within your budget range. This may happen quickly, or it may take a while. But you’ll want to make sure that you act within the time constraints of the pre-approval. If you fail to close on a home before your pre-approval expires, you’ll need to re-apply.
Once you find an ideal home, you’ll want to make an offer to try to buy the property.
If the seller accepts your offer, you’ll go to the bank and finalize the details of the sale and mortgage by signing some documents and getting it approved for the sale.
Note: Make sure not to make any major changes to your credit lines or income before buying a home. If you change jobs or buy something else that requires a line of credit before closing on the home, you may mess up your pre-approval and need to start all over again.
After The Purchase
Once the funds are available and the house is purchased, you get to put your name on the title—and you will now owe the bank the sum of the mortgage to be paid back over time.
Generally, this works by you making monthly mortgage payments (which include some of the principal along with interest), which eventually will pay down your loan to the bank.
Once you pay the entirety of the principal of the mortgage, the terms will be satisfied and you’ll own your home outright.
This is how people who don’t have a ton of cash upfront can still afford to buy homes and become homeowners, especially since you can pay a mortgage off over time to become a full-fledged homeowner.
Conclusion
Hopefully, this post has helped you to understand the very basics of how a mortgage works, and how you can leverage it to become a homeowner—even if you don’t have the cash right in hand.
This is one of the great things about the modern financial system—that there are institutions that empower citizens to become homeowners as long as they have a good enough credit score and they can be trusted to pay back the balance over time.
