What is the difference and similarity between a loan and a mortgage? How do you qualify for a mortgage? And what are the various types of mortgage?
Secured loans specifically tied to real estate properties like land or a house is called a mortgage.
One of the biggest dreams of most Americans is to own a house. While some might succeed at raising the money for their homeownership by themselves so that they can pay cash, others resort to taking a loan from a lender.
Saving a portion of your revenue from your high-income skills or job can help you buy a home faster but if that doesn’t work, getting a mortgage will help.
In this article, we will show you how the home buying process works, all the mortgage basics, loan types and all you need to achieve your homeownership. But before then, let’s look at the definition of a mortgage.
What is a Mortgage?
A mortgage, which is also known as a mortgage loan, is a type of secured loan specifically taken out to buy a land or home property with the intention that the borrower pays back the money with interest over a particular period of time.
How long does a mortgage run? Most mortgage loans run for 25 years but it could be more or less depending on the agreement you reached with the lender. Factors that will determine your interest are your mortgage rate, how much you borrowed and for how long.
How Does a Mortgage Work?
Whether you want to know how a mortgage works for first-time buyers in the UK, the United States, Greece or Dubai, they all have something in common. You must be willing to put down a cash deposit of a particular percentage of the price while your mortgage lender fulfills the rest. Thereafter, you can pay back with interest over a period of time.
The borrower signs an agreement with the lender. This agreement gives lenders the legal rights to repossess a property if you fail to meet the terms of your mortgage by not repaying the money you’ve borrowed plus interest.
In the UK and the United States, for instance, you must deposit at least 5% of the total price of the property. In Australia, most lenders demand that you deposit at least a 20% upfront payment for the property. In UAE, mortgage deposit is between 25% to 35% while the mortgage bank or lender finances the rest.
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How Do You Qualify for a Mortgage Loan?
To qualify for a mortgage loan, you will need to meet certain eligibility criteria. To be eligible for a mortgage, you will need to have a stable and reliable source of income, a debt-to-income ratio of less than 50% and a decent credit score of at least 580 for FHA loans or 620 for conventional loans.
Whether you are retired, self-employed or working for the government, the four basic criteria for getting a mortgage loan from any lender are your credit, equity, income and asset. You will have to go through the mortgage prequalification and preapproval stage before you can be approved.
For you to know if you actually qualified for a secured loan, you can compare mortgages and see your chance of approval with selected lenders using some of the best mortgage comparison websites. Using mortgage comparison websites to check your eligibility does not in any way affect your credit score.
What is the advantage of buying a house using a mortgage rather than paying cash? There are some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off. For example, investors sometimes mortgage properties to free up funds for other investments. While some invest in gold, some invest in precious metals like silver and the stock market, and quite a good number of others reinvest in their business.
Having explained what mortgage is, how it works and how to know if you are eligible for a secured loan like a mortgage, let’s look at the difference between a loan and a mortgage
What’s the Difference Between a Loan and a Mortgage?
The term “loan” can be used to describe any financial transaction where one party receives a lump sum and agrees to pay the money back.
A mortgage is a type of loan that’s used to finance a property. A mortgage is a type of loan, but not all loans are mortgages.
Mortgages are “secured” loans. With a secured loan, the borrower promises collateral to the lender in the event that they stop making payments. In the case of a mortgage, the collateral is the home. If you stop making payments on your mortgage, your lender can take possession of your home, in a process known as foreclosure.
Mortgage Loan Types
While there are many types of mortgage loans, each of them comes with different requirements, benefits and interest rates.
When applying for a mortgage, here are the different types of mortgage loans you will come across. They will to a large extent help you master how to get a mortgage fast. Knowing about them will help you make an informed decision.
FHA loans which are known as the Federal Housing Administration loans are a popular choice because they have low down payment and credit score requirements. You can get an FHA loan with a down payment as low as 3.5% and a credit score of just 580.
Since this type of loan is backed by the Federal Housing Administration; what it means is that the FHA will reimburse lenders if you default on your loan. Knowing that the FHA will pay off the loan if you fail to help to lower the risk lenders take. This is why they don’t care if you have a credit score of 580.
Conventional loans are any type of loan that is backed or guaranteed by the federal government. Once you meet certain criteria as determined by the lending body, you automatically qualify for it.
Conventional loans are a popular choice for buyers. You can get a conventional loan with as little as 3% down. If you put down less than 20% for a conventional loan, you’ll usually be required to pay a monthly fee called private mortgage insurance, which protects your lender in case you default on your loan.
USDA loans are only for homes in eligible rural areas (although many homes in the suburbs qualify as “rural” according to the USDA’s definition.). To get a USDA loan, your household income can’t exceed 115% of the area’s median income. USDA loans are a good option for qualified borrowers because they allow you to buy a home with 0% down. For some, the guarantee fees required by the USDA program cost less than the FHA mortgage insurance premium.
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Veterans Affairs Loans
VA loans are for active-duty military members and veterans. Backed by the Department of Veterans Affairs, VA loans are a benefit of service for those who’ve served our country. VA loans are a great option because they let you buy a home with 0% down and no private mortgage insurance.