A mortgage is a secured credit agreement used to purchase immovable property. Real estate acts as collateral. Usually, debtors must pay the lender within 15-30 years in a series of equal monthly payments. Each mortgage payment includes part of the principal and interest.

This credit type requires a down payment of 3-20%. A larger upfront payment allows for lower interest rates.

The Fundamental Components of Mortgage

Every loan of this type involves the core elements:

  • Principal — a monetary sum a borrower needs to buy the property. The data obtained by the Mortgage Bankers Association shows that the average credit amount for purchasing a house is about $405,400 in 2024. The standard credit range is $150,000-1,500,000.
  • Interest rate — the commission charged by banks or other creditors. The current average percentage is 5-7%. The commission can be fixed (FRM, doesn’t change over time) or adjustable (ARM, alters periodically depending on the index). The latter features a lower rate in the first 3-10 years.
  • Mortgage term — the period over which borrowers must repay the credit.

Occasionally, regular payments comprise part of principal and interest, property taxes, and home insurance.

The Mortgage Process

It contains these steps:

  1. Borrowers apply to one or several lenders, which check their solvency.
  2. After getting a pre-approval (a document that indicates the maximum sum lenders agree to give), would-be debtors seek an appropriate property and make an offer.
  3. Then, borrowers apply for a mortgage and send a pack of documents to a chosen lender.
  4. Underwriters assess the individual’s application.
  5. A buyer and a seller meet to perform a closing. A borrower makes a down payment and gains ownership of the property.

Creditors’ Requirements for Borrowers

Banks and other organizations attach strict conditions to customers, considering large amounts of mortgages. Lenders check the following:

  1. Credit Report — contains the applicant’s personal data, payment history, and details of their credit accounts and their statuses.
  2. FICO Credit Score — a figure determining the borrower’s creditworthiness. The lowest credit score for mortgage approval in the USA is about 620.
  3. Information about the applicant’s income and employment history — certificates of salary, tax return transcripts, etc.
  4. Debt-to-income ratio — used to compare the applicant’s monthly loan repayments to their gross monthly income and determine whether the borrower can pay off the mortgage on time.
  5. Loan-to-value ratio — utilized to calculate a lender’s risk. The mortgage amount is divided by the appraised property value and is represented as a percentage. High LTV ratios entail higher credit percentages.

Precise requirements depend on the creditor.

Key Points to Consider Beforehand

Borrowers are advised to look for these things:

  • The size of credit;
  • The interest rate and its type;
  • The closing costs of the credit, in particular, the bank’s fees;
  • The annual percentage rate;
  • The loan period.

Additionally, it’s vital to check for extra spending. First, borrowers must figure out whether the creditor levies a prepayment fine. Some banks and other organizations also set a balloon payment — a separate lump-sum payment made at the end of the credit period.