What is a Home Loan?

So, you’re thinking about buying a home! At a time when we’re bombarded with information, it can be overwhelming to find the answers you need. But don’t worry! Home.loans is here. So let’s start at the beginning. 

What is a Home Loan? 


A home loan (also referred to as a mortgage) is a type of loan where the piece of real estate or land you wish to buy is used as collateral by your financial lender. A home loan is an agreement between you, the homebuyer, and a financial lending institution. While a home loan allows you to use the home, the lender technically owns it until you pay off your loan entirely. 

In order to be granted a loan, you transfer money to the financial lender of your choice and begin the loan paperwork and approval process.

This common practice is the way many people choose to proceed with buying a home. Since purchasing a home outright, in cash, is a rare prospect, many individuals or families acquire a home loan to buy a home. The mortgage payments are manageable and are in accordance with what the buyer can afford over a long time period.

Keeping everything in order is a legally binding deed, which details the terms of the sale between you and your lender. In the loan’s legal agreement, it states that the debt will be paid during a certain time frame (for example, over a thirty-year period). It also details the interest rate for the home loan. And finally, the legal agreement will state that if you cannot pay, the lender will repossess your residence.

Securing a Home Loan: The Process

Yes! You’ve found your dream home! 
So what comes next?
Well, you’ll apply to a mortgage lender who will see if you are qualified to handle a monthly mortgage payment and own a house. Everyone must go through this application process to see if they get approved. (Sadly, not everyone does.)
There are many factors that determine if you’ll be approved: 

  • Your credit score

  • Your income

  • Your assets and investments

  • The amount of debt you carry

  • Your repayment history (You must pay your bills on time!)

  • Your overall financial history

  • And more

If approved, the lender will subtract your down payment and issue you the remaining amount of money needed to purchase that special dream home of yours. This amount will be paid over a certain amount of years (often 15 or 30) at a certain interest rate.

Home loan pre-approval is a crucial step in securing a loan. In this early stage, you will also determine how much of a mortgage payment you can handle. It is also the time to go over your lending options while factoring in your down payment. 

Your down payment is a portion of the sale price of the home you wish to buy. Typically, a down payment is between 3-20 percent of the home price, though there are some no money down options for qualified candidates. However, a 20% down payment is a standard and recommended practice for all home buyers.

Overall, the home loan underwriting process determines your risk as a borrower by making sure you meet the minimum financial requirements. This is decided through documentation and verification of your history. You must provide all necessary proof. 

Qualifying for a Home Loan: An Overview

In order to determine if you are qualified, a home loan underwriter will assess your risk as a borrower. The lower the risk, the closer you are to your dream home.

The necessary items needed for home loan approval often includes:

  • Bank statements

  • W2’s

  • Paycheck stubs

  • Tax returns

  • List of additional assets or investments

  • Recent credit report

  • Home appraisal

Your bank statements, W2’s, paycheck stubs, and tax returns will help your lenders decide if your employment and income are sufficient. It will also reveal whether any other monetary assets will help you pay your monthly mortgage. A recent inheritance, income from side jobs, financial settlements paid to you, and outside investments, can count as sources of income which can improve your chances of being granted a home loan. Your recent credit report will help determine your overall financial history. 

  • Do you have a history of paying your bills late?

  • Do you carry high credit card debt?

  • Have you ever filed for bankruptcy?

If you answered yes to any of these, a lender may not grant you a home loan. Your risk as a borrower may be too high.

Your Home Loan

However! If you’ve done everything right financially, a lender may grant you a home loan. (Dream house here you come.) Once the contract agreement begins, you will make the agreed monthly payments until the mortgage is paid off in full or until your home is sold.

In the home loan process, your residential property is the collateral. If you cannot pay, your lender will take your home. This is called foreclosure. However, if you sell either through a traditional sale or short-sale, the sale price will pay off the remaining mortgage owed.

There are different types of loans. There are conventional fixed rate loans, adjustable rate mortgage (ARM), federal housing administration (FHA) mortgages, first-time homebuyer loans, a VA mortgage, USDA home loans, and more.

Buying a home is one of the biggest financial moves you will ever make in life. Understanding everything you can about home loans, the pre-approval process, and hidden costs will ensure that you’re making the best decisions when it comes to your home and future. 

Armed with detailed knowledge, your purchasing powers will only strengthen, making buying a home an empowering process, not an intimidating one. 

Ready to learn more? Let’s discuss the different types of home loans available.

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