How Does a Mortgage Work?

How does a mortgage work? A mortgage is a form of a pledge of real estate. It is taken out when you buy an apartment on credit: the bank gives part of the money, and the buyer gets the right of ownership with an encumbrance. If you do not repay the loan on time, the bank can sell the apartment and take the money back against the debt. You can take out a mortgage on almost any residential property — an apartment in a new building under construction or already completed an apartment on the secondary market, or a private residential house.

Who can get a mortgage

Usually, a mortgage loan is taken for a significant amount for many years, so it's severe and for a long time. To take out a mortgage, the borrower must meet specific requirements that help the bank determine his reliability. 

Banks will approve a mortgage if the borrower meets the following requirements:

  • Age. Most lending institutions require that the borrower be at least 21 years old at the time of the mortgage and not more than 65 years old at the time of full repayment. However, in some cases, the upper limit can be adjusted by agreement with the bank.

  • Seniority and a stable place of employment. The borrower must have worked at least 3-6 months.

  • Solvency. Mortgage assumes regular payments for at least several years, so the bank needs to ensure that the borrower has a stable income, which he can document. To do this, you will need to provide a certificate indicating the source of income — a salary, pension, income from renting premises, and so on.

People with a good credit history and with no other large outstanding loans at the time of the mortgage agreement are also more likely to be approved for a mortgage. To assess the possibility of a mortgage loan, the bank considers the total financial burden on the potential borrower, so if your current credit obligations are already approaching 50% of your monthly income, you need a co-borrower to get a mortgage.

In addition, banks assess the credit rating of the borrower. The score must be above 500. Then the client has a chance of a positive response from the bank. The credit rating affects the interest rate. The bank can reinsure itself and prescribe terms that are favorable for itself in the contract. So, now you can understand how home loans work.

Stages of registration of the mortgage loan

A mortgage is an essential step in life. It would help if you weighed all the pros and cons. It is a loan that is granted for several years. You must repay it in full at the end of the contract period. How does a house loan work? It is a complicated process. You should understand all risks and choose the bank with a good deal. 

  • Calculate your monthly payment. A mortgage assumes you will have to make a monthly payment to the bank over several years. Therefore, before you sign a loan agreement, use a mortgage calculator to determine the size of the loan, calculate the payment, determine a comfortable down payment amount for you, and find out the preliminary cost of the loan. The monthly mortgage payment should not be more than half of your family's total income.  

  • Estimate a down payment. It is possible to get a mortgage, but at a higher rate without a down payment. So it is worth saving up enough money to pay the down payment. The minimum contribution amount is 10-15% of the value of the purchased property, but you can contribute more — this will reduce the loan amount, reduce overpayments, and even get a lower mortgage rate.

  • Create a financial safety net. In case you lose your job or have a sudden decrease in income, it's better to have an emergency fund of at least 3-6 months of family income. This will allow you to make your mortgage payments on time and help you get through a difficult period more easily.

Once all the documents are collected, you can apply to the bank. You do not have to go to the branch or make an appointment with a bank specialist — you can apply for a mortgage online at the website of the credit institution. To do this, you need to fill out a small questionnaire and attach the documents you have collected—a preliminary decision on the application's approval and the loan amount. And the interest rate can usually be obtained within one working week after the application is submitted.

Once the bank has reviewed and approved your application, you can begin looking for an apartment. Searching and collecting the necessary documents on the flat usually takes up to 90 days. So much prior approval of the mortgage, but in some cases, the bank may extend this period at the borrower's request. Approach this stage as carefully as possible — remember that the apartment you choose should not only be like you but also meet the bank's requirements — not to be pledged to other loans and not appear in the open court proceedings.