How Do Mortgages Work?

Mortgages might be one of the most essential and common parts of the home-buying experience, but they’re also one of the most misunderstood. Whether you’re on the search for your first home or just need some clarification, here’s how mortgages work—and what you need to know.

What is a mortgage?

In the simplest terms, a mortgage is a loan from a bank or other financial institution that enables you to cover the cost of your home. It’s a legal agreement with the bank saying you will pay the loan back (plus interest) over the course of years—decades, usually. Unless you have the money to pay cash for your property, you’re going to need a mortgage.

Get mortgage pre-approval

Your first action item is to seek pre-approval from Alderus. It’s important to note that pre-approval and pre-qualification are two different processes. For pre-approval, the lender will check your credit and other financial information to determine what price home you can afford. This will give you a price range to stay within during your home search and lets buyers know that you’re serious when you make an offer.

Getting a typical mortgage takes an average of 20-35 days. So if you’re itching to buy right away, you’ll want to start the pre-approval process soon so you’re ready to go when you find the right house. Alderus recommends getting pre-approved and having all of your financial documentation ready in order to increase your chances of securing a mortgage in a timely fashion.

Some people also choose to get pre-qualified before getting pre-approved. A mortgage pre-qualification is an initial assessment of the type of mortgage you can qualify for, more of a big-picture idea of what you can afford. But it doesn’t carry the same weight with sellers or mortgage lenders as a pre-approval.

Apply for a mortgage

Once you find a home you want to put an offer on, you have to obtain the actual mortgage loan. Within three days of your application, you should receive a loan estimate that includes closing costs, the interest rate, and the monthly amount you’ll pay for the principal, interest, insurance, and taxes. After that, it’s off to the underwriter, who will review all of your financial information and make the final call to approve or deny your loan.

Yes, you can actually still be denied even after you’ve been pre-approved for a home in that range. Denials most frequently occur when some aspect of your financial picture shifts between the time you’re pre-approved and the time you apply for the actual mortgage (e.g., you lose your job or use a large portion of your savings).

If approved, you’ll sign the final mortgage loan documents during closing.

Getting a mortgage and buying a house is a milestone, so once the process is done, it’s time to celebrate!