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What is a mortgage loan?

A mortgage is a type of loan that is used to finance the purchase of a property. This might be a single-family home, a condo unit, a multi-family dwelling or an investment property. Mortgages are also used on the commercial side to purchase industrial buildings, office space or other types of commercial property.

A mortgage is a loan that is secured by property that is being purchased. In the event the borrower can’t repay the mortgage, the lender can use the underlying property to try and recoup the remaining balance on the mortgage. 

Buying a home is generally the largest purchase that most people make. Understanding mortgage loans is critical. Getting the right mortgage for your situation can significantly impact your overall financial situation and can help you make the home of your dreams an affordable reality.

Today's Current Mortgage Interest Rates

While mortgage lenders’ requirements have grown significantly stricter in recent years, the COVID-19 pandemic has led to extremely low-interest rates on mortgages. Even a fraction of a percentage point can lead to thousands or tens of thousands of dollars in savings over the term of a mortgage.

Mortgage rates can vary widely depending on various criteria, such as your credit history and the value of your new home, along with market conditions. According to Freddie Mac’s Primary Mortgage Market Survey, the average American mortgage rates as of 10/29/20 are as follows:

Mortgage interest rates have dropped nearly 50% in the last 2 years

Source - MacroTrends

Buying a House in 2020

Even under normal conditions, buying a house presents challenges of one sort of another for buyers. Buying a house in 2020 comes with a number of challenges.

One factor has been a dwindling supply of homes in some parts of the country. This stems from a combination of some sellers taking their home off the market and increased demand for homes in many areas. In some cases, sellers may have decided that this isn’t a good time to move, or perhaps they’ve encountered a financial situation that has led to this decision. Due to the pandemic, many families have decided to move out of congested urban areas and into suburban areas. In many cases, the lower supply and increased demand have resulted in higher prices and stiff competition.

Mortgage Interest Rates & COVID-19

The economic fallout from COVID-19 has impacted the mortgage market in the form of stricter requirements from many lenders. Perhaps having learned from the financial crisis of 2008, many lenders have tightened their lending standards. 

These more stringent requirements vary by lender, but some examples are:

• Some lenders have raised their minimum credit scores in general, or at least require to qualify for more preferential interest rates and mortgage terms. 
• Some lenders have increased the down payment amount required to qualify for a loan.
• In some cases, mortgages that had previously been pre-approved are subject to a re-verification process prior to the finalization of the loan.
• Even government-backed loans through the FHA and VA have been impacted by some lenders’ stricter minimum requirements to obtain these loans. 

The bottom line for home buyers is that these tougher requirements may require more shopping to obtain an affordable mortgage. 

How to Choose the Right Mortgage Lender

Choosing the right lender takes a fair amount of research and requires a thorough review of your situation before you even start your search. For example, if you are a first-time buyer, some lenders might be better than others for your situation. Other factors that can help determine the best lender for your situation might include:

• Do you have a high credit score, or are there issues here?
• Are you looking for a 30-year mortgage or perhaps one with a 15-year term? 
• Are you a veteran?

The key factors to consider when starting your search include:

• Your credit score
• The amount of your down payment
• The loan term you are seeking
• Extra fees and closing costs associated with the mortgage
• The interest rate

The types of lenders you might consider include:

• Banks
• Credit unions
• Online lenders

In some cases, it might make sense to work with a mortgage broker who can help you look across the mortgage lender spectrum and can often help you obtain the best deal. Some online mortgage sites offer access to several different lenders, much like a traditional mortgage broker. 

How to Apply for Low Interest Rates

A mortgage application is a longer process than most other financial transactions that you might engage in. It’s essential to be prepared with the required documents and information before completing the application. This includes:

• Recent pay stubs or verification of employment
• Bank statements for all accounts
• Your most recent personal and if applicable, business tax returns
• W-2s for at least the past two years

Additionally, the lender will run a credit check on to obtain your credit score. They will also ensure that the property you are looking to finance is actually worth the purchase price. 

Here are the answers to some commonly asked questions about obtaining a mortgage. 

What's the difference between an adjustable and a fixed-rate mortgage?

A fixed-rate mortgage is based on a fixed interest rate. This is the rate used to calculate the monthly payments that will remain fixed over the loan term. The benefit is certainty about the level of your monthly payment over the life of the loan.

With an adjustable-rate mortgage (ARM), the interest rate can adjust periodically. Typically the interest rate is fixed for an initial period and then adjusts periodically. Sometimes there is a cap on the amount of the adjustment. Often whether the rate changes and by how much is based upon some sort of benchmark such as the rate on 1-year Treasury Bills. An ARM might start off with a lower rate than a fixed-rate mortgage, but if interest rates rise, the interest rate could skyrocket drastically, increasing your monthly payment.

Should I get a conventional or government-backed loan?

The answer depends upon your situation. If you have good credit, have the ability to make the required down payment, and have a steady employment history, a conventional mortgage might be the best option for you. Conventional loans often carry the best interest rates and terms.

An FHA loan might be a good option for those who are not “perfect” applicants. This might include a lower credit score, an inconsistent work history, or other blemishes that could deter a lender on a conventional loan. An FHA loan carries a government guarantee, which gives the lender a bit more security. 

If you are a veteran, a VA loan might be a good option for you. Again, the government guarantee allows the lender to risk you even if your financial situation doesn’t match up with what might be required for a conventional loan.

Will applying for a mortgage affect my credit score?

When lenders check your credit score, it is reflected as a credit inquiry. If you apply for several mortgages within a compressed time frame of 45 days or less, these multiple inquires by mortgage lenders will show up as a single credit inquiry. 

How long will the process take?

Generally, the mortgage application process should take about 30 days. This could end up being longer or shorter. Some online lenders might be able to complete the process in as little as a week. In other cases, especially during peak periods for applications, this process can stretch out a bit longer. Much will also depend upon how prepared you are with the information the lender requires.