The idea of buying a house in the US can be overwhelming when one considers getting a mortgage. If this is you, please know that you are not alone. The world of mortgage can be confusing with a long list of terms and options to go through. But all that mental stress and work has been done by us for you in this article. In this guide, we will break down all you need to know about mortgages in the US, from the basics to the very complex aspects.
What Is Mortgage?
To start with, we must first define what a mortgage is. A mortgage is a loan that you obtain in order to purchase a home. However, it is a long-term loan, typically with a repayment period of 15 or 30 years depending on the institution that gave you the loan. You will pay off gradually every month, till you have fully repaid the loan. The property you are buying secures the mortgage, and this simply means that if you fail to meet up with your monthly payments, the lending institution can foreclose on the property and take possession.
Types Of Mortgages In The US
The important thing to note about mortgages is that there is almost a unique type of mortgage tailored to every individual and every class of society. Below are the different types of mortgages available in the US:
1. Fixed Rate Mortgage:
The most common type of mortgage in the US is the fixed-Rate Mortgage. Going by the name, the interest rate is usually fixed for the duration of the loan, meaning that you will pay the same amount monthly for the duration of the loan. The advantage of this type of payment plan is that it makes it easy for you to budget for your mortgage re-payments since you will know exactly how much you will be paying each month.
2. Adjustable-Rate Mortgage
An Adjustable-Rate Mortgage (ARM) just like the name states, is a type of mortgage where the interest rate can change over time. For the first 5-7 years the interest rate remains fixed, and after that period the rates are adjusted annually based on a predetermined index. While ARMs can be riskier than fixed-rate mortgages, they can also be a good plan if your plan is to sell the home before the adjustable-rate period reaches. This is a good option if you have a knack for investment.
3. FHA Loan
The FHA Loan is a unique type of mortgage that is insured by the Federal Housing Administration (FHA) for you if you chose to take the loan. This mortgage plan was specifically designed to make homeownership accessible to people with lower credit scores and also to people who cannot afford to make a substantial down payment. The requirements and terms for qualifying for this loan are lenient when compared to other conventional loans, although they come with additional costs such as mortgage insurance.
4. VA Loan
A VA loan is a unique type of mortgage that is guaranteed by the Department of Veterans Affairs (VA). This VA loan is specifically meant available to current and former members of the military and their spouses. VA loans offer several advantages, which include lower interest rates and no down payment requirement.
The Mortgage Process & How To Go About It
Now that we have exhausted the various types of mortgages in the US, let us take a look at the process of getting a mortgage that suits you. The various stages of applying for a mortgage are listed below:
Before you start the tedious process of looking at homes, it is advised that you get pre-approved for a mortgage first. This phase will give you an idea of how much you can afford and also make you a more competitive buyer for the house.
Once you have found the home you want to buy, the next step is for you to submit a mortgage application to your chosen lender. The application will carry information about your income, employment history, credit score, and other financial information.
The lender commences the underwriting process after you have submitted your application. The lender goes ahead to verify the information you provided and assess your creditworthiness among other financial background checks.
If your application is approved by your preferred lender, you will then move on to the closing process, where you will get to sign to final paperwork, pay your closing costs, and officially become a homeowner.
Buying a home is no small decision, as getting a mortgage is often a huge task for many. But with the information we have provided in this guide, getting started should not be an issue for you, because you have been handed the right compass to navigate the world of mortgages.