Last Updated: March 10, 2024
If anyone were to ask what the basic necessities of life are, most people would respond with “food, water, and shelter.” Indeed, having a roof over your head and a safe place to sleep at night is essential to the well-being of all Americans. When looking for shelter, our options are limited to either renting or buying a place to live, assuming we don’t want to live with our parents for the rest of our lives.
The concept of renting is pretty straightforward, but buying a home requires understanding the concept of borrowing money. Besides a car, your home will probably be the most expensive thing you own. In this article, I will explain the basic aspects of a Mortgage.
The Difference Between Rent and a Mortgage
Rent is a monthly payment that we make to someone else for a property THEY own. While mortgage is a monthly payment that we make on property that WE own. The most significant difference between a mortgage and rent is that a mortgage is borrowed money.
When you purchase a home using a mortgage, the lender essentially fronts you the money for the majority of the home’s value (minus your down payment), and you make monthly payments to repay the loan with interest. This creates a situation where you gradually build equity in the property. Over time, as you pay down the principal amount of the loan, a greater portion of your monthly payment goes towards ownership, and you eventually own the home outright once the mortgage is fully paid off.
Mortgages work much like car loans. If you do not pay back the loan, you risk having the asset (in this case, the home) taken from you. This is called foreclosure.
Types of Mortgage loans
There are two major types of mortgage loans: The FHA loan and the conventional loan.
An FHA loan is a government-backed loan, that generally has lower income, down-payment, and credit requirements than conventional loans. You can gain more insight into the difference between these two loans in my article “FHA vs Conventional Loan: What’s the Difference?”
Do I Need a Job to Qualify for a Mortgage?
Yes, you will need a job to qualify for a mortgage. Mortgage lenders will thoroughly verify your income to approve you for a mortgage loan.
Furthermore, you must generally have a two-year work history that can be documented to receive a mortgage loan (some exceptions apply).
Do I Have to Have Good Credit to Get a Mortgage?
You may qualify for an FHA loan with “bad credit.”
FHA’s minimum credit score requirement is 500. However, this will exclude you from certain types of FHA loans. Additionally, if your credit score is below 580, you will need to have a Loan-to-Value (LTV) of 90%.
Conventional loans requirements vary depending on the lender. However, you generally cannot get a conventional loan if your credit score is less than 620.
Where do I apply for a Mortgage Loan?
If you seek an FHA mortgage, I would suggest starting with your local housing agency.
To apply for a conventional loan, you can start with your local bank or credit union.
Additional Resources:
Search for HUD approved lenders for FHA
