Mortgage Process Basics And Key Terms
Sarah Li Cain5-minute read
February 03, 2022
Buying a home and taking on that financial responsibility can seem overwhelming. The process of finding a home, negotiating the sales price and submitting documentation to take out a huge loan isn’t exactly easy, but it can be done.
Aside from figuring out what neighborhood you want to live in and the type of house you want, it’s also important to learn mortgage basics. That way, you can make sense of it all for what many would consider the largest purchase of their lives.
We’re here to help you navigate it all with our mortgage 101 guide so you’re ready when you begin the application process.
Unless you buy a house in cash, you’ll need a mortgage. This is a type of secured loan, using the home you purchased as a collateral. That means you sign an agreement promising to pay back the lender – typically in monthly installments – on an agreed-upon term. If you don’t pay your mortgage, you’re at risk of going into default and the lender can foreclose on your home and take it back.
Your monthly mortgage payment isn’t only to pay back what you borrowed from the lender. Instead, it typically includes the following:
- Taxes – Your lender will use this money (held in an escrow account; more on this below) to help you pay your annual property taxes to your local municipality, city or county.
- Principal – This is the amount you borrowed (sometimes you’ll see it as “amount financed”)
- Interest – The amount your lender charges you to borrow money used for your mortgage
- Insurance – Again, this amount is held in an escrow account which the lender will use to pay your homeowners insurance. If you put less than 20% down as a down payment when purchasing the money, then you’ll most likely need to pay private mortgage insurance or PMI. You’ll need to keep paying this amount until you reach 20% on the original purchase price.
- Other fees – If your home is part of a homeowner’s association (HOA), your lender may use your monthly payment towards your HOA fees.
Your lender should break down your monthly payment amount and indicate where your funds are going. Reach out to them if you have any questions.
When shopping around and applying for a mortgage, you’re probably going to come across many terms.
Here are a few important ones to look for:
- Preapproval or prequalification – Though these terms are used interchangeably, they're actually different. Prequalification means that you've given the lender some basic information like income and current debt and they've done some initial calculations about how much you can afford. Prequalification on the other hand means that the lender has asked for more information, such as your credit score and therefore can make you look like a more serious buyer since you've got your financing in place.
- APR – Known as the annual percentage rate, this number is the “true cost” of what you’ll need to pay the lender for taking out a mortgage and includes the interest rate and any additional fees.
- Rate – Expressed as a percentage, this is the cost you pay to borrow money. It does not include any other charges associated with the mortgage loan.
- Escrow – This is a neutral third party that handles money for home buyers and sellers. This is where you could put your earnest money, your homeowners insurance or property taxes.
- Points – This is a fee you pay upfront to help lower your interest rate. It’ll depend on how much your lender charges, but one point usually lowers your interest rate by 1%.
- Earnest money – This is money, usually 3% – 5% of the home’s cost, you need to put down to show you’re serious about purchasing the home. The cash is held in escrow until you get your mortgage approved and the seller keeps it if the sale falls through (there are some exceptions).
- Underwriting – This is part of the mortgage process where the lender reviews your loan to determine whether it should be approved.
- Equity – This is the amount you own and can be calculated by taking the current value of your home and subtracting it from what you still owe.
- Closing costs – This is the amount you need to close on your mortgage. It’s sometimes referred to as settlement costs.
- Prepayment penalty – You may need to pay a fee, or penalty for making extra payments or paying off your mortgage early.
- Loan estimate – This is where the lender will send you a document (3 business days before closing) that breaks down the loan. It’ll include the interest rate, APR, estimated monthly payments, insurance, taxes, cash you need at closing and estimated assessments.
It’s crucial that you understand these terms. They explain aspects of your mortgage such as how much you’ll pay each month throughout the lifetime of your loan, as well as other fees you’ll need to pay at closing. These terms will also be helpful when shopping around for different lenders.
Steps In The Mortgage Process
Although the details may differ depending on your lender and your financial situation, here’s a general breakdown of the mortgage process:
- Preapproval or prequalification – You’ll begin by shopping around for lenders to determine how much you can qualify for, plus rates and terms. If you submit multiple applications within a short time frame, the credit bureaus typically view it as one inquiry, so it may not impact your credit score as much. Be sure to submit all of the required mortgage preapproval documents so the lenders have everything they need.
- House hunting – Once you know how much you qualify for, you can then find a house you like and negotiate with the seller. Once you’ve agreed on the purchase price and other contingencies, you move onto the financing stage.
- Mortgage application – Here’s where you officially apply for a mortgage. You’ll need to submit more personal information and agree to a hard credit inquiry, which could affect your credit score.
- Loan processing and underwriting – Your loan officer will verify the documents you submit like your employment, income and assets. This person will also order a home appraisal to determine the property’s value and other checks to ensure your loan gets processed efficiently.
- Closing – Here’s where you put the predetermined amount of money in your loan estimate into escrow. Then you’ll sign all required documents and the house is yours.
How Long Does It Take To Process A Mortgage?
Since the whole mortgage process has many morning parts, it can take a while for everything to be done. This includes everything from preapproval (or prequalification), to getting a home appraisal, to the underwriting. Typically it can take around 30 days from when you officially apply for your mortgage to when you get your home loan. However, during busier times of the year, it can take an average of 45 – 60 days.
Hopefully this guide has provided you some insights into the mortgage basics and some key terms you need to know. If you're ready to begin, start by getting preapproved.
Apply For A Mortgage Online
Viewing 1 - 2 of 2
What’s The Difference Between A Condo, Townhouse And Apartment?
Ready to move, but not in the market for a stand-alone single-family home? Read our article to decide whether you should rent an apartment or buy a condo/townhouse.