If you’re like most homebuyers, you’ll need to borrow money—by way of a mortgage loan—to buy a home.
But if you’re like many people, you’re not exactly sure how a mortgage works. You’re not alone; it’s a little more complex than it sounds.
What is a Mortgage?
A mortgage is a loan provided by a lender to an individual, couple, or group to purchase a home. However, a mortgage is considered “less risky” than other types of loans, and that’s because there’s real property attached to it—and that property is used as collateral. (If you don’t pay the lender what you owe, the lender will take the house and sell it to someone else.)
How Do You Get a Mortgage?
If you’re a smart homebuyer—and you are—you’ll talk to more than one lender about getting a mortgage. You have the right to shop around for the best interest rates and benefits, so you should exercise it; if you don’t, you could end up paying thousands more over the course of your loan.
Once you find the lender who will offer you the most favorable terms, you’ll begin the application process. You’ll need plenty of documentation to prove to the lender that you can pay back the loan, including:
Proof of income from sources other than work
Your lender will also run a credit check to see whether you’re known for paying your bills on time.
Lenders also check your debt-to-income ratio. They want to know how much outstanding debt you have, whether it’s with another home, credit cards, vehicles or other sources, and they want to see how that stacks up to the amount of money you bring in each month.