Jason O'Neil | July 13, 2022
This is one of the biggest misconceptions and misused phrases in all real estate.
To be 100% clear, home buyers do not get a mortgage, in fact, they get a loan and give a mortgage.
If you’ve been wondering, what is the difference between a mortgage and a loan, grab your real estate notebook, you’re about to get schooled.
A loan simply is money that has been borrowed with an offer or a promise to repay. There are tons of loans out there, but for the sake of this conversation, we’re only going to talk about real estate loans.
All real estate loans are secured loans meaning that the borrower (home buyer) is promising collateral to the lender if they are no longer able to afford payments — in this case, the home is that collateral.
It’s important that a mortgage loan is secured for the lender’s benefit.
So where does “mortgage” come into the conversation?
A mortgage is an instrument given from a borrower to the lender that secures the lender’s interest in the property. Think of a mortgage as the rule for repaying the loan.
Regardless of the type of loan, a lender will typically require a mortgage.
I’ve heard the classic mortgage joke at some closings, “pay and stay, you don’t, you won’t” and I couldn’t agree more with it.
Mortgages simply align the lender and the buyer to ensure that everyone’s money is safe and each party holds up their end of the agreement.
You’re going to hear these two terms thrown around a lot when we’re talking about mortgages. While they are similar there is one stark difference between the two that you should know.
Pre-qualified means that based on what you’ve told the lender, you would qualify for the loan.
Pre-approved typically means that the lender has verified your assets, credit score, and income.
See the difference there?
Pre-qualified is an estimation based on the information that you share with the lender. Pre-approved on the other hand, shows that the lender has already gone through your financials and determined that you can afford a mortgage.
In most situations, pre-approval is always going to be better than pre-qualified.
There are tons of different mortgages out there and trying to navigate them all can get confusing quickly, so for the sake of simplicity, here are 5 different types of loans you should be aware of.
These are simply loans that are not backed by the government, meaning that the private lender will not lean on the government to supply the loan to the borrower.
This loan is not guaranteed by the FHA (Federal Housing Administration) or VA, but is often sold to another party or more likely Fannie Mae or FNMA (Federal National Mortgage Association)
This type of home purchase financing typically requires a 20% down payment. You can however pay a lower down payment, but it usually results in paying an additional monthly fee known as private mortgage insurance.
I encourage borrowers to avoid this if possible—just pay the 20%.
This is a real estate loan that is guaranteed by the Federal Housing Administration (FHA), meaning that if you default on your loan, the FHA will come in and pay the lenders. Because of this, borrowers can qualify for as little as a 3.5% down payment.
These are very popular loans for those who might have a lower credit score or debt.
If you are an active or non-active member of the military or a spouse of a military member, these loans are for you. VA Financing loans are backed by the Department of Veteran Affairs, which guarantees restitution to the lender in the event of default.
The great thing about these loans is that there’s no down payment required and doesn’t require private mortgage insurance like an FHA Financing loan.
This is a loan that uses alternative ways to qualify a buyer that does not follow federal standards. The situation varies, but the benefit of these loans is that the lenders can determine the parameters or guidelines to show that you can pay the loan, even if it doesn’t meet government standards.
These loans are often held by the lending institution instead of being sold on the secondary market. Since the underwriting is atypical, the interest rate and terms are generally more favorable to the lender.
Often referred to as Doctor Loans or Physician Loans, these are home loans that are designed specifically for medical doctors or dentists. They typically have a much lower down payment, advantageous terms, and may be specifically for the lending institution’s existing customers.
Everyone’s situation is different, as such, be patient in this process and follow these helpful tips as you start applying for a mortgage loan.
Know your purchase goals and timeline.
Most people do not intend to have a loan or be in the home they are purchasing for 30 years, yet, they pay a premium for a 30-year fixed mortgage.
Consider looking at alternative options for your mortgage that favors the financial goals you have.
In the same vein, try to get as good of an understanding as you can of your timeline. This is critical because it may allow you to lock in a rate earlier.
Talk to your financial advisor.
Financial advisors are in the mix of real estate constantly and they also have a clear understanding of your financial situation. Allow them to weigh in on this process as they most definitely will have some helpful guidance as you start shopping around for lenders.
Shop at least two lenders.
Never settle for one. Just like any loan, it’s important to shop around and see what is out there as not all lenders will provide the same numbers.
The interest rates should be comparable, but you want to evaluate what type of loan structure they recommend based on your personal situation.
Ask lenders if there is a “float down” available to you after you lock. What this means is that if you lock a rate for 60 days at 5.25% and rates go to 4.875% can you go to the lower rate or are you locked in at the higher rate?
Limit spending and do not open any new lines of credit.
This should seem like a given but some people like to get trigger happy and start buying other goodies like furniture and whatnot before they even put down an offer.
Remember that this is a major money move and that lenders will be looking at all your financials so don’t give them a reason to second guess.
Note: this process can get a little redundant so be prepared to restate a few things and show the same stuff over a few times. Trust me, it’s worth the time!
There you have it, the basics of a mortgage and how you can get started on applying for one!
As a reminder, let me just tell you that the home buying process is supposed to be fun! People get caught up in all the buying, selling, negotiating, and stressing, that they miss out on the joy of this journey.
I encourage you to embrace it and enjoy it, these moments don’t come around often!
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