Home loans are typically provided by banks, credit unions, or private lenders. As the borrower, you agree to pay back the loan, or principal, plus a bit more, called the interest. The amount of interest you pay is based on the interest rate your lender charges.
The time frame for paying off your home loan is called a term. During the term, you agree to make regular payments until you’ve paid both the principal and the interest. Most home loan terms are 15 or 30 years, but you can have a different term. Payments are often monthly, but can also be biweekly to accelerate the payoff process.
The home loan is the actual money you borrow, and the mortgage is the document that describes all the conditions of the loan, including the:
In reality, people use “home loan” and “mortgage” interchangeably. You might hear someone say that they’re “paying their mortgage” when in fact they’re paying the home loan described in the mortgage note. Don’t worry, your bank isn’t going to mince words as long as you’re paying everything on time.
In June 2021, the median price of a house reached $363,300 , according to the National Association of Realtors. That’s more than most of us have in savings, so home loans are common for just about anyone buying a house. Where you get the loan from can vary. While most people go to a bank or credit union for a loan, they can also have a seller-backed financing agreement that is privately executed. This is where the seller extends credit to the buyer.
Home loans must be secured prior to the close of escrow. Most people get pre-approved for a loan so that their purchase offer is taken seriously and escrow has fewer hiccups, but this isn’t always the case. Ultimately, you need your home loan to fund prior to the close of escrow so that the title can transfer according to the purchase agreement.
Loan requirements vary from lender to lender and from loan type to loan type, but all require both income verification and creditworthiness. Here are some of the basic requirements for common home loan types:
No-money-down home loans can seem like a great deal because you don’t have to save up for a hefty down payment. However, you need to look at your current situation and long-term goals to know if they’re the right option for you.
Pre-approval for a home loan means the lender has agreed that you qualify for a loan of a certain amount under certain terms. You have met the credit and income requirements and your DTI is in the approved ranges. The only thing missing is the actual property you are buying.
A pre-approval letter indicates that a lender is willing to a specific amount so you can make an offer on a house. This gives the seller confidence that you are qualified to buy the property, and the transaction can move forward.
The lender will still need an appraisal performed on the property to ensure that the value of the home is appropriate for the amount you’re borrowing. If the appraisal is below the amount the lender has approved, you may need to renegotiate the price of the home, pay more up front, or walk away from the property because the loan won’t be funded.