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What is a mortgage?

A mortgage is a loan provided by a bank or a financial institution for buying residential or commercial real estate. A mortgage can be given to either an individual or a business.

If you are looking to buy a property, you will most likely have to take out a mortgage loan.

How it works

  • The bank pays the seller up to 80%–95% of the property value on your behalf. You pay the remaining 5%–20% percent from your personal savings.
  • You become a “borrower” of the bank and are liable to repay the mortgage amount in monthly installments at an agreed-upon rate of interest usually over a period of 15 to 30 years.
  • You have the option to take out a fixed-rate-mortgage (FRM), where the interest rate for the loan stays the same throughout the life of the loan, or an adjustable-rate mortgage (ARM), where the interest rate may fluctuate throughout the life of the loan.
  • Most banks cap your monthly mortgage installment at a maximum of 28% of your monthly income. For example, if you make $5,000 per month, the bank will not let you take out a mortgage loan that requires a monthly payment of more than $1,400.

Basic actors influencing your mortgage eligibility

Mortgage Approval Factors

At what age do I qualify for a mortgage?

A mortgage is a contract, and only someone who is legally recognized as an adult may sign a mortgage contract. This usually means that the borrower must be at least 18 years of age. When you apply for a mortgage, however, the bank will typically ask for your financial records (income, bank statement, and tax returns) for the last three years, which, in effect, increases the minimum age to 21.

Calculator: How much will you have at retirement?


Since the 2008 U.S. financial crisis, mortgages have come under severe criticism and regulatory scrutiny, but a mortgage offers three important advantages for the average borrower:

  • You may own your home. For most homebuyers, a mortgage is the only way to own a home. A mortgage allows one to build equity in the property.
  • It’s an investment opportunity. While the bank holds the property as collateral, you are the owner. You can always resell the property at a higher value, pay off the remaining mortgage, and keep the profits resulting from the sale.
  • You earn tax breaks. The interest paid on a mortgage can also qualify for a tax break from the government.


The main risk associated with a mortgage is the possible loss of property. If you are unable to pay the mortgage installments, the bank can legally repossess your home through the process of foreclosure. This may happen within 3–6 months of your first missed payment.

Besides losing the property, your financial credit ratings are also severely damaged from the foreclosure, which makes it incredibly difficult for you to obtain a loan or credit card in the future.

Fun facts:

  • In Scotland, homeowners paint their front door red when they pay off their mortgage.
  • Charles “Pretty Boy” Floyd was a Depression-era gangster who would destroy mortgage documents (to free citizens of their debts).
  • Self-employed business owners have the most difficulty getting approved for a mortgage. Since many of them write off most of their income, they seem to have no income.



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