When someone is interested in buying a house, they often do not have all the money they need liquid, sitting in a bank account. Houses can be very expensive, meaning even many adults need to borrow money in order to buy a decent place to live. There are several ways for someone to obtain that money, so let’s examine the most popular to understand the work that goes into securing it.
Most commonly, when someone wants to buy a house, he or she will go to the local bank and ask them for a mortgage — a loan specifically for the purpose of buying property. The bank takes a lot of information into account when considering someone for a mortgage. First, they look at someone’s work history, along with any relevant sources of income. They want to see that the person buying the property has a job or is otherwise generating income (through investments, rental property, company ownership, etc.), and is making enough income to be able to afford all the payments that will be associated with the property, most notably the mortgage payment, every month.
Second, they look at their current level of debt. Debt is anything a person owes another person, company or entity. The bank has to make sure that the buyer isn’t obligated to give too much money making payments to other people relative to their income level.
Third, they check the buyer’s credit score and history. A credit score is based on how well adults interact with their debts. The bank or lender need to ensure that the person seeking the loan has a good history of paying back everything as obligated — if they haven’t paid other hard money loans responsibly in the past or otherwise managed their money and debts, it is a good indicator that the person may default in timely mortgage payments as well.
Weighing all of these factors, the bank will generate an offer for the borrower, explaining the amount of money the bank is willing to lend, and under what terms: how long a repayment term and at what interest rate. The underwriting involved with your mortgage will be complicated, and the application process can be exhaustive. Additionally, many people in the market for a property will have gone to the bank or a mortgage broker to secure a pre-approval letter; it’s important to understand that what the bank eventually ends up extending to you may differ from what was initially indicated on the pre-approval letter, as the pre-approval is not a contract, rather an estimate of what you will be granted.
When considering home ownership or property acquisition, it’s important to seek the advice of a financial planner and/or mortgage broker to know how best to organize and present your finances for a favorable response after applying for a mortgage. Also know that when you apply for a mortgage, your lender will make what’s referred to as a “hard pull” of your credit — meaning that it’s understood that you’re seeking to undertake new debt, so your credit score will be affected by the action. If you’re on the fence, it may be best to wait until your decision is certain, lest your credit be negatively affected during a moment of indecisiveness.