What Is Mortgage Loan Purpose?
Mortgage loan purpose is simply how a borrower intends to use the proceeds of the loan. Your lender wants to know why you’re applying and what you’re applying for, whether you’re buying a first home, or want to withdraw equity on an existing property.
Take a look at different mortgage loan purposes, how they work, and what it means for you.
Definition and Examples of Mortgage Loan Purpose
The mortgage loan purpose is the reason you are applying for a mortgage. Mortgage loan purposes can vary depending on your situation. For example, you may be looking to buy a property, or looking to refinance when interest rates have dropped.
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Refinancing when interest rates are low can save you a lot of money over the life of your loan, although you’ll also be responsible for paying closing costs. You’ll want to calculate the breakeven point for refinancing to determine whether it’s worth it.
Your lender wants to know why you’re getting a mortgage. Your answer will help the loan’s underwriter determine the level of risk in lending to you, and the risk level can affect the interest rate your lender will charge you.
Here are some common mortgage loan purposes:
- Purchasing a primary residence
- Buying a vacation home
- Building a house
- Acquiring an investment property
- Refinancing a home
- Applying for a home equity loan
You’ll likely encounter the question of mortgage loan purpose when you apply for your mortgage, although this will depend on your lender.
- Alternate names: Loan purpose, purpose of loan
How Mortgage Loan Purpose Works
Let’s say you and your significant other purchased a home 10 years ago. Since then, you’ve changed jobs, earned more money, and had two children. Together, you and your partner decide you’d like to do some construction on the house, including the installation of a pool.
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Requesting a loan purpose isn’t restricted to mortgages. Other loans, such as personal loans, may also require that you provide the purpose of the loan.
Altogether, the renovations will be costly, and you don’t want to drain your savings to finance it. After much discussion, the two of you decide to apply for a second loan on your home.
Since this is a one-time purchase and not an ongoing need for funds, you decide on a home equity loan rather than a home equity line of credit (HELOC). The home equity loan functions similarly to your initial loan: You’ll get a lump sum of funds, and then make payments at fixed rates.
When completing your mortgage loan application, you’ll want to indicate that you’re using the funds for renovations. This will be your mortgage loan purpose.
What Does Mortgage Loan Purpose Mean for You?
The reason you state for your loan will affect how your lender views your application. In the above scenario, a family further settling into a primary residence may be considered a less-risky option than others.
Another example would be if you’re seeking to purchase an investment property. As an investment property isn’t one that you’re living in, lenders consider this a riskier proposition. Your interest rates will rise accordingly to account for this risk.
Before applying for a mortgage, you should consider the purpose of your loan. This is especially true in cases when the mortgage loan purpose can increase your interest rates, such as the purchase of a vacation property.
These types of mortgages will have higher interest rates than primary residences, although you can help offset these increases by making yourself an excellent borrowing candidate.
This can be done in several ways, including:
- Maintaining a high credit score
- Paying off credit card balances in full
- Having a stable income
- Not incurring new debt
- Having cash reserves
This doesn’t just apply to second advice homes or investment properties; Being a good candidate can help lower your interest rates no matter the type of mortgage loan you’re pursuing.
Key Takeaways
- Your mortgage loan purpose is the reason why you’re applying for a loan, such as for the purchase of a primary home, to refinance, or to get a home equity loan.
- Lenders will ask for the mortgage loan purpose to determine their risk in lending to you.
- Higher-risk situations, such as buying an investment property, will result in higher interest rates.
- Presenting yourself as a good candidate will help you acquire the best loan possible, no matter your mortgage loan purpose.