How Does A Mortgage Work?

If you ask the average person what a mortgage is, they will likely tell you that it’s a loan for a house. However, most people probably couldn’t tell you much more than that. To put it simply, a loan is simply a contract to repay an amount owed typically according to a structured payment plan.

The difference with a mortgage is that the mortgage loan is tied to the house, that is to say, the home is the collateral against the loan. Additionally, the period of repayment on a mortgage is usually significantly longer than, say, a car loan which averages only 5 years. A typical mortgage loan is written for a duration of 15 to 30 years.

In today’s article, you see the mortgage process explained in more detail, including some topics such as escrow, amortization, and the phases of getting a mortgage such as applying and underwriting.

Mortgage Application Phases And Underwriting

Applying for a loan is a relatively straightforward process, but you’re probably wondering, what does a mortgage lender look for? Your OVM Loan Officer will ask you some basic questions regarding your income, down payment, and credit. After it has been determined that you meet the basic requirements for a loan approval, you can typically seek the services of a real estate agent and begin finding your dream home.

Once you’ve found the home you wish to buy, the actual process of obtaining the loan will begin. You will be asked for various documents related to your income and down payment. Furthermore, there will be an appraisal of the property to ensure the value meets the loan amount. It’s also recommended that most borrowers obtain a home inspection to ensure the home is either defect-free or that you are aware of any defects that may exist before you purchase the property.

Once all these documents and requirements have been satisfied it will then go to underwriting, where a qualified and licensed underwriter will examine your documentation and provide final loan approval for closing.

What Is Amortization?

Amortization is a big word with a simple explanation. Each time you make a mortgage payment, part of the payment is applied to the interest owed on the loan, and part of the payment is applied to the principal balance. The principal balance is the actual amount owed on the home, separate from the interest. Another way to think of amortization is simply the payment plan that you will follow regarding your monthly payments on your journey to paying off your home entirely!

What Is Escrow And Why Is It Helpful?

Here at OVM Financial, it is a requirement, as it is with all lenders, that the home must have property insurance in case of damage, as well as ensuring the property taxes are paid to the relevant authorities.

There are 2 ways this can be done. You as the borrower may pay your insurance and property taxes on your own each year, or you can ask the lender to set up an escrow account.

Escrow accounts eliminate the headache of having to put money aside each month to ensure you have enough at the end of the year to pay your property taxes and insurance. With escrow, your monthly mortgage payment will include the amount that needs to be set aside to pay not only your homeowners insurance but also your property taxes. Additionally, with an escrow account, your taxes and insurance will be paid automatically. This helps to save you time and the difficulty of dealing with your local tax assessor’s office.

At the end of the year, if there is any additional money in the escrow account that was not applied to taxes or insurance, you can choose to roll it over to the next year or you could take it as a refund or even apply it directly to your principal balance on the loan!

Conclusion

Getting a mortgage can be a scary thought for many people, but we here at OVM Financial are committed to making the process as painless as possible. Our Loan Officers are ready and standing by to answer any questions you may have as well as guiding you throughout the entire loan process from start to finish!

With our years of experience, you’ll be in good hands and can sleep easily knowing you have a professional at the ready to help you in any way that we can.