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What Happens When You Apply For a Mortgage?

A mortgage is a loan that gives you the right to buy or refinance a home. It usually requires a down payment and lasts over 10 years or more. During that time, you pay interest and make payments to the lender, who has the legal right to take back the property if you don’t repay your loan.

When you apply for a mortgage, the lender reviews your credit history and other factors to determine how much they will loan you. Lenders often use a tool called a debt-to-income ratio to figure out how much they will give you.

You can also compare lenders by looking at their annual percentage rate, or APR. The APR will tell you how much money you’ll be paying in interest and fees, compared to what other lenders charge.

Appraisal: When you apply for a mortgage, your lender will send an appraiser to your home to look at its value. The appraiser will compare the information on your home with similar homes that have recently sold in your area. This helps the lender make sure that the home is worth the amount you are borrowing.

Mortgage insurance: If you don’t have a substantial down payment or are a first-time homebuyer, your lender may require that you get mortgage insurance. The insurance protects your lender in the event that you don’t repay your loan as agreed.

Amortization: Your monthly mortgage payment will go toward paying off your interest and reducing the balance on your loan (also known as the principal). In the early years, a larger portion of the payment goes to interest. In later years, the percentage of your payment that goes to interest will decrease, and more of it will go toward reducing your loan balance.

Down payment: The down payment is the cash you put down when you purchase your home. The down payment can be as low as 10% of the home’s price, or it may be more than 20%.

Points: Sometimes called mortgage points, these are optional fees you can pay to lower your interest rate. One point usually costs 1% of the total amount you are borrowing, and for each point you purchase, the lender reduces your interest rate by 0.25 percentage points.

Loan estimate: You’ll get a Loan Estimate from your lender when you’re preapproved for a mortgage. It will include all the fees and rates you’ll have to pay for a mortgage, along with other information that can help you make a more informed decision.

Mortgage prequalification: A mortgage prequalification isn’t as thorough as a preapproval, but it can provide you with a rough idea of how much you can borrow to buy a home. You’ll need to fill out a mortgage prequalification form that includes your income, credit score and other financial info.

Credit report: Your credit report shows your history of credit card and other debt payments, as well as your income, employment and other personal information. Your credit report is important to the mortgage process because it lets lenders see if you can afford your new mortgage and if you will be able to make your payments on time and in full.

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