Understanding Mortgages For Your First Home 

Buying your first home is as much of a challenging endeavor as it is a celebratory moment. 

There is much to consider, from choosing a lender to seeking pre-approval to how you’ll budget for your monthly payments to avoid mortgage delinquency. The home buying process is crucial, and getting preapproved for a mortgage early can help identify any potential financing issues. 

In this article, we’ll briefly cover a few of the main topics a new mortgage-holder should know before diving into the world of mortgage financing. We’ll discuss the pre-approval process, obtaining final approval, and your basic obligations as a borrower to avoid delinquency. 

Understanding the Preapproval Process 

Lenders only approve qualified applicants for mortgages. For this reason, prospective home buyers must seek pre-approval from a bank or lender to confirm 1) whether they are qualified to take out a loan, and 2) approximately how much they are qualified to borrow, thus limiting their housing options. 

The preapproval process starts with gathering documents to demonstrate income, assets, and work history. This information helps lenders determine a suitable loan amount and interest rate. Pre-approval also involves the lender running a credit check to view your credit score and general credit history. Conventional loans usually require a credit score of 620, while government-backed loans like VA and FHA loans often have a lower requirement. 

Once your information and documentation have been submitted, you typically receive a loan estimate within a few business days. The preapproval letter you receive can then be taken to sellers as proof of your ability to finance a property purchase. It usually lasts 60-90 days before expiring but can be renewed with updated financial information. A loan officer can assist you with the pre-approval process, providing guidance and answering any questions you may have. 

You may have also heard the term “prequalification.” Understanding the difference between prequalification and preapproval is crucial. Mortgage prequalification is an early step in the home-buying process that provides an estimate of your borrowing capacity based on financial information and a credit check. While prequalification offers a rough estimate, preapproval provides a detailed insight into your financial standing. You can read more about these terms in our article about them here. 

In general, the pre-approval process not only streamlines house hunting but also strengthens your offer in competitive markets and helps you be seen as a serious buyer. Mortgage preapproval offers clarity on your budget and enhances your home buying experience. 

Obtaining Final Mortgage Approval 

After obtaining pre-approval, the next step is the full approval process. Knowing how much house you can afford before making an offer is crucial. This step occurs once you’ve made an offer on a home that has been accepted by the seller. The buyer and seller will sign a purchase contract detailing the terms of the sale, any repairs or alterations agreed on by both parties, an approximate closing timeline, and any contingencies included. 

Your lender will assess details like the selected property’s appraisal value and home condition for final approval. Specifically, they are looking to see that the home appraises for around its purchase price so that the loan amount is adequate. Pre-approval helps streamline the mortgage process by ensuring that much of the necessary documentation and verification is already completed. 

Because some deals can fall through at this point, an important step is to include a mortgage or financing contingency in your purchase contract. A mortgage contingency clause essentially guarantees your ability to negotiate or back out of the deal entirely if you fail to secure appropriate funding for the purchase from the lender. Including this clause protects both buyer and seller, so speak with your real estate agent if one isn’t included. 

Reviewing Basic Borrower Obligations 

As a mortgage-holder, you know have a few critical responsibilities. The first is to, of course, make regular, on-time mortgage payments, usually at least one every month. Your loan contract should detail the exact amount of your monthly payment. 

Your loan contract may also include an amortization schedule for your loan, detailing how much of your payments is going towards the principal and interest each month. This can vary depending on the type of loan you have (e.g., adjustable-rate vs. fixed-rate), but most borrowers start off paying a higher percentage of their payment towards interest before paying off more and more of the principal towards the end of the loan term. 

Your other responsibilities as a mortgage-holder include: 

• Adhering to all loan terms outlined in the loan agreement 
• Keeping the property insured 
• Performing regular maintenance 
• Notifying the lender of any issues or obstacles 
• Surrendering the property in the case of unresolvable delinquency 

Dangers of Mortgage Delinquency and the Foreclosure Process 

Speaking of delinquency, understanding mortgage delinquency is extremely important when applying for a mortgage. Delinquency on mortgage refers to the failure to make timely payments on your mortgage loan, usually for at least 30 days. When you fall behind on payments, you risk facing consequences such as late fees, a negative impact on your credit score, and even foreclosure. 

A foreclosed home is a property with a defaulted mortgage that has been reclaimed by the original bank or lender. These homes may stay under the ownership of the lender for a while, and potential buyers can find and purchase them at a discounted price through different channels. 

If you encounter financial hardship, you can be comforted that your home won’t be foreclosed on right away. There are usually several steps that can be taken to resolve the situation before your lender would look to foreclose on your home. The first thing you need to do is reach out to your mortgage servicer, who may be different than your lender contact. Mortgage servicers work with mortgage-holders to engage in loss mitigation strategies, or methods of resolving a delinquency to help you get back on track with your mortgage. Loss mitigation strategies can include: 

• Forbearance (temporarily pausing your mortgage payments) 
• Repayment plans 
• Loan modification 
• Reinstatement (making a lump-sum payment of past-due amounts) 
• Selling your home 
• Short sales 
• Deeds-in-lieu of foreclosure (handing over the rights to your property to your lender) 
• FHA Payment Supplement Offering (for FHA loans) 

It’s essential to communicate with your lender if you anticipate difficulty in making payments to explore potential solutions. If the underlying problem is a temporary setback, paycheck back-up, or other similar issue, the chances are high that the problem can be resolved simply by working with your mortgage servicer. 

The very worst thing you can do is nothing. Failure to address your delinquency on mortgage can lead to more severe outcomes, including foreclosure and the property becoming Real Estate Owned. Properties that are Real Estate Owned (REO) in real estate are owned by mortgage lenders, banks, or investors post-foreclosure. These properties are typically sold through REO agents or auctions “as is” at discounted rates to facilitate a quick sale and recoup losses. 

What happens to REO properties after this? These properties are often sought-after by real estate investors. One advantage is the discounted price, which can be appealing to buyers looking for a bargain. Additionally, financing options for an REO property can be flexible, making it easier for buyers to secure a loan. However, purchasing an REO property also comes with challenges, such as the potential need for significant repairs and the ‘as is’ condition of the property. Rest assured, however, that your property won’t end up down this pipeline into the hands of a new owner if you are diligent with your mortgage payments, communicate frequently with your mortgage servicer, and are proactive in preventing foreclosure and delinquency in the first place. 

Conclusion  

Taking out a mortgage for the first time can be overwhelming. Between communicating with agents, lenders, servicers, and others, however, borrowers have a tremendous amount of help and resources available to them. Take this article as your starting point as you continue to research, learn, and grow closer to signing your first purchase contract and starting your journey into homeownership.