What is a mortgage and how does it work?

Information, they say, is power. This is true in every sense and scenario. And now looking at mortgages, sound information on what it entails will make a whole lot of differences between two individuals.

On a certain day, two friends John and Peter who graduated from the same department at the University of Lagos also known as Unilag met. They both graduated a decade ago and are working in almost the same company, with a similar salary structure. 

While they seem to be doing well on average, one was far better off than the other. Peter still lives in a rented apartment, while John has a home in his name. To Peter, it was incredible, knowing how much his old friend earned. And so how could he have owned a house, he queried his doubtful mind. 

Although Peter has heard about mortgages and mortgage institutions, he didn’t pay much attention to them. You might as well blame him, but not quickly. In a country like Nigeria,  where everything seems to be failing, he was quick to dismiss the fact that it was possible to get a house through a mortgage. He has heard how difficult it is to secure a mortgage loan and also knows about the bureaucracies involved. And as such he didn’t put in much effort in finding how.

But not for John. He understood that there might be limitations, so he did his research on the possibilities of securing a mortgage, and he followed it up with action. 

The difference between Peter and John is not based on income level, but the willingness and interest to know more about mortgages, their possibilities and opportunities. 

Of course, not everyone can secure a mortgage loan, but with the right knowledge, you can prepare yourself to be at the vantage point when it comes to securing one.

This article talks exhaustively about what a mortgage is, how it works and how you can become a homeowner through a mortgage loan.

What is a mortgage?

An individual can get or keep a home or other real estate by using a mortgage. This is a particular kind of financing provided by mortgage banks. Under a mortgage, you consent to make periodic payments to the lending institution, mainly in the form of principal and interest-bearing instalments. Afterwards, the aforementioned property is used as security for the loan.

To be qualified for a mortgage, you have to meet several requirements, like having a minimum credit score and making a down payment, and you also need to adhere to their suggested application process. Mortgage applications must pass a rigorous underwriting process to proceed to the closing step.

A mortgage can also be seen as a lien on or claim against real estate. If the borrower defaults and ceases making mortgage payments, the lending institution may proceed with a foreclosure on the property. The lending institution will have a claim on the property, for instance, if they pledge their house to their lender.

This protects the mortgage bank’s interest in the home if the debtor fails to make payments as agreed. This may result in the residents being evicted, the property being placed up for sale, and the mortgage obligation being settled with the proceeds from the sale by the lending institution or mortgage bank.

Mortgage banks or institutions 

Facilitating mortgage loans is the primary focus of a mortgage institution. Banks provide mortgages to people looking to purchase real estate, including homes. This bank is not like any other conventional bank. Banks that specialize in mortgages only lend money.

Regular deposits that are accepted by banks are not accepted by them. These organizations also go by the name of mortgage originators. Primary mortgage institutions (PMI) such as Cooperative mortgage banks, banks, and The National Housing Fund are among the major players in the Nigerian mortgage market. 

How mortgage works 

To purchase landed properties without having to pay the full amount upfront, individuals and corporate entities employ mortgages. Just the loan balance and interest must be repaid by the borrower over a predetermined number of years to fully discharge their debt and own the property. Mortgages have a typical span of fifteen to thirty years 

Using a hypothetical N20 million loan with a 30-year duration and a 20% interest rate can help illustrate this. This will let you understand how much your mortgage monthly payment is going to be. An N20 million mortgage loan with a 20% interest rate over 30 30-year duration is broken down as follows. Please keep in mind that this is a hypothetical situation:

Loan Amount: N20,000,000

Interest Rate: 20% per year 

Loan duration: 15years

Your monthly mortgage payment, based on these figures, would be almost N351,259.30. This is the amount you must pay monthly for 15 years.  Let’s examine the parts of this payment now.

How to calculate your mortgage 

There are several online programmed mortgage calculators online you can use to calculate the monthly cost of your mortgage. Just search online and you may see a variety of them. All do the same function.

Things to avoid before applying for a mortgage 

1. Changing Jobs immediately before applying for a mortgage 

When you change your career or job weeks before meeting with a lender, it might hurt your chances of qualifying for a mortgage. A lending company may want to make sure you have a stable source of income and want to be certain that you can afford to pay a mortgage return monthly. 

The notion is that If you start a new job right before you begin your mortgage application, you might not even have a pay stub to show the lending institution how much you’ll be bringing home going forward.

2. Forgetting to check your credit card credit score 

Your credit card score tells a lender a lot about you. It lets them know whether you’re financially responsible and shows the likelihood that you will be able to pay off the money you borrowed in the future. You should know that  it’s mostly one of the criteria that lending institutions use when approving mortgages for home buyers 

 So the idea is to check your credit score before filling out an application for a mortgage.

3. Co-signing on a Loan for someone 

You must think carefully before agreeing to co-sign a loan for someone, a child in college or another relation, especially if you’re trying to apply for a mortgage. If you do co-sign a loan,  you become partially responsible for that loan, and  If the borrower defaults with payment,  you may become liable, which will ultimately affect your credit score. 

4. Closing a credit card account

Imagine you are in debt with your credit card, and you think that the best option is to close the account, thinking it will improve your credit score. It’s not true.

Of course, there are certain occasions where closing a credit card account might be a good move, but If you want a mortgage, you must note that it will be counterproductive. When you do this, and reduce your level of available credit, your debt-to-credit ratio could shoot up. And as a result, your credit score could sink.

5. Making a major purchase

When you make a big purchase like buying new appliances or buying a new car before applying for a mortgage it could lead to a lender rejecting your mortgage application. This is because you will need to have a lot of cash on hand when you are purchasing a house so that you make a down payment, and pay for other costs and insurance. 

So if you’re very interested in  buying a house, you should reduce other  financial obligations 

6. Getting married to someone with bad credit

It is very common for couples to buy a house together. But you must consider the fact that if you’re purchasing a house together using a mortgage, both of your credit scores may be considered together. If any of you have a bad credit rating, it might cause the lender to discontinue the purchase.

7. Making big deposits

If you choose to use a mortgage to purchase a home, you can choose to make a sizable deposit into your account to persuade the lender that you are suitable. However, that might not be helpful. 

You will usually be let down if you deposit a large sum of money into your bank account before seeing a lender. This is because lenders typically prefer to see evidence of substantial balances that have been in your account for a minimum of two months.

Advantages of mortgage 

1. Property Appreciation: The worth of your home may rise as a result of an appreciation in property values over time. If you ever decide to sell, this may bring you even more financial advantages.

2. Investment Opportunity: Making mortgage payments starts the process of accumulating equity in your house, which will eventually prove to be a valuable asset. The difference between your property’s market value and the amount still owed on your mortgage is called equity.

Conclusion

Everyone, Every adult and family deserves a home.

This is one of the basic needs of man.  But this will be realized through mortgage financing. But it is so unfortunate that in Africa, especially in Nigeria,  mortgage financing for housing is not familiar to the average man.

The housing deficit in Nigeria will be resolved if every Nigerian is educated on the importance of mortgage financing. Also, everyone should be encouraged to get a mortgage.  The government and other mortgage originators must be able to make mortgages accessible and affordable at a relatively fair interest rate.