What Is a Mortgage? Loan Process, Types and Payments Overview
Definition: What is a mortgage?
A mortgage is a written agreement that gives a lender the right to take your home if you don’t repay the money they lend you at the terms you agreed on. Your mortgage payment amount is based on how much you borrow, your loan term length and your interest rate.
Your monthly mortgage payment has two main parts: principal and interest. The principal chips away at what you owe, while interest is what the lender charges you for borrowing the money. Early on, most of your payment will go toward interest. But that changes as the years pass, with increasingly larger portions of each payment going toward the actual principal balance.
Most homebuyers opt for a 30-year fixed-rate mortgage because it locks in the lowest stable payment that never changes. Some borrowers choose an adjustable-rate mortgage (ARM) to snag a lower rate for the first three to 10 years, though the rate can adjust annually after that initial period.
What is a mortgage refinance?
A mortgage refinance is the process of getting a new home loan to replace an existing one. Homeowners typically refinance for three reasons:
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To get a lower interest rate
When mortgage rates fall, you can save on your monthly payment by refinancing to the lowest refinance rates available. -
To pay your loan off faster
Switching from a 30-year to a 15-year term can save you thousands of dollars in interest — if you can afford the higher payment. -
To put extra money in the bank
You can convert home equity into cash with a cash-out refinance, and put the extra funds toward financial goals or home improvements.
Learn more about how to refinance a mortgage.
Current mortgage interest rates
Rates have fallen by a half-point or more since July and even more than that since January, and that’s a big deal. For example, on a $500,000 home with a 30-year mortgage at 7% with a 10% down payment, you’d pay $3,895 per month. Drop that rate to 6.20% and your payment falls to $3,657. That’s a difference of $238 per month, which can be really significant to the average American family who is on a tight budget.
30-year FIXED
Current mortgage purchase rates are averaging:
6.18%
Current average rates are calculated using all conditional loan offers presented to consumers nationwide by LendingTree’s network partners over the past seven days for each combination of loan program, loan term and loan amount. Rates and other loan terms are subject to lender approval and not guaranteed. Not all consumers may qualify. See LendingTree’s Terms of Use for more details.30-year FIXED
Current refinance purchase rates are averaging:
6.58%
Current average rates are calculated using all conditional loan offers presented to consumers nationwide by LendingTree’s network partners over the past seven days for each combination of loan program, loan term and loan amount. Rates and other loan terms are subject to lender approval and not guaranteed. Not all consumers may qualify. See LendingTree’s Terms of Use for more details.5 ways to qualify for better mortgage rates and terms
Lenders set minimum mortgage requirements that you’ll need to meet to get preapproved for a home loan.
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The higher your credit score, the lower your interest rate will be
A lower interest rate means a lower monthly payment, which makes homeownership more affordable. -
The higher your down payment, the lower your monthly payment
A 20% down payment will help you avoid mortgage insurance if you’re taking out a conventional loan. Mortgage insurance covers the lender’s foreclosure costs if you default on your loan. -
The longer the term, the lower your monthly payment
First-time homebuyers typically choose 30-year terms to get the lowest monthly payment. -
The less debt you already have, the more you can borrow
Clear out those auto loans, student loans and credit card balances if you want the most mortgage borrowing power. Lenders limit how much you can borrow by comparing your total debt to your income. -
The more you shop, the more likely you are to get a lower rate
A recent LendingTree analysis shows that borrowers who shop with multiple lenders can save thousands of dollars in interest charges over the life of their loans.
It’s easy to comparison shop with LendingTree — fill out your information once and we’ll send it to several lenders. When lenders compete for your business, you can get the best rate possible.
How to qualify for a home loan
Lenders look at four aspects of your finances to assess whether you meet the minimum mortgage requirements for a mortgage preapproval:
Your credit scores
You’ll need to get your credit score up to 620 or higher to qualify for a conventional loan. Keep your credit balances low and pay everything on time to avoid drops in your score.
If you can boost your score to 780, you’ll get the best interest rates possible with a conventional loan.
Your income and employment history
A steady employment history for the last two years shows lenders you have the stability to afford a regular monthly payment. Keep copies of your pay stubs, W-2s and federal tax returns handy, as you’ll need them during the mortgage process.
Your debt compared to your income
Conventional lenders set a maximum 43% debt-to-income (DTI) ratio, but you may get an exception if you have lots of extra savings and a high credit score. Lenders divide your monthly income by your monthly debt (including your new mortgage payment) to determine your DTI ratio.
Your down payment and savings funds
The minimum down payment is 3% with a conventional loan, but it can pay to put down more if you’re able. If you’ve had rough patches in your credit history, mortgage reserves — which are just extra funds in the bank to cover mortgage payments — may mean the difference between a loan approval and denial.
You’ll snag the best conventional mortgage rate if you have a 780 credit score and a 25% down payment.
Your step-by-step guide to getting a mortgage
Phase 1: Prepare
- Check your finances. Request a credit report with scores from all three major credit reporting bureaus: Equifax, Experian and TransUnion. Use a home affordability calculator to understand how much you might qualify to borrow.
- Choose the right type of mortgage. Do you need to focus on a low-down-payment mortgage program? Do you want to put 20% down to avoid mortgage insurance? Knowing your real estate and financial goals can help you choose the best mortgage for your needs.
- Decide on your mortgage term. A 30-year, fixed-rate loan is the most popular choice for the lowest monthly payment. However, a shorter, 15-year fixed loan may save you thousands of dollars in interest charges, as long as your budget can handle the higher monthly payments.
- Save, save, save. Besides saving for a down payment, you’ll need cash to cover your closing costs — these could range from 2% to 6%, depending on your loan amount. Boost your emergency savings to cover unexpected repair costs and maintenance expenses. Lenders may require you to have cash reserves that could allow you to continue paying your mortgage in case you lose your job or have a medical emergency.
Phase 2: Shop and apply
- Shop, shop, shop. LendingTree data show that borrowers can save $80,000 on average when they compare rates from at least three to five mortgage lenders. Give the same information to each lender so you’re comparing apples to apples when reviewing rate and fee quotes. It can help to compare the terms listed in all of your loan estimates.
- Get a mortgage preapproval before you house hunt. A preapproval letter confirms you can get a mortgage loan to shop for homes within a set price range. Home sellers are more likely to take you seriously as a buyer if you’ve been preapproved.
- Make an offer on your dream home. Once you’ve found the perfect place, submit your best offer along with a copy of your preapproval letter. If your offer is accepted, you’ll also pay the required earnest money deposit to show your commitment to the transaction.
You can find the best mortgage lenders online, or ask your real estate agent, friends or family for a recommendation. To get the best rates for your mortgage, shop for current mortgage rates with at least three different lenders.
Rates change daily, so gather the quotes on the same day to ensure you’re comparing apples to apples figures. Get a mortgage rate lock once you find a home and keep track of the expiration date to avoid costly extension or relock fees.
Ready to get started? Learn about how to choose the right mortgage lender for you.
Phase 3: Close
- Get a home inspection. Once your offer is accepted, schedule a home inspection to identify any needed repairs or major issues. Once you negotiate repairs with the seller, your lender will typically order a home appraisal to verify the home’s market value.
- Cooperate with the underwriter. Your lender’s underwriting team will ask for paperwork to verify all the information on your loan application. Be prompt in your responses to prevent delays. Once you receive final loan approval, a closing disclosure will be given to you at least three business days before your closing date. It’ll reflect the final costs of the transaction, including how much money you need to bring to the closing table.
- Complete your final walk-through and closing. Before you head to the mortgage closing, walk through the property to double-check that all necessary repairs were completed and the home is ready for you. At the closing, you’ll cut a check for your down payment and closing costs, sign the closing paperwork and receive the keys to your new home.
Types of mortgage loans
A conventional loan isn’t guaranteed by any government agency and remains the most popular mortgage option. Lending rules for conventional loans are set by Fannie Mae and Freddie Mac, and borrowers with scores as low as 620 may qualify for 3% down payment financing.
Your military service may make you eligible for a no-down payment VA loan, a loan backed by the U.S. Department of Veterans Affairs (VA). There’s no mortgage insurance requirement regardless of your down payment, and qualifying guidelines are more flexible than other loan types.
A second mortgage is a home loan secured by a home that will be – or already is – secured by a first mortgage. The most common types of second mortgages include home equity lines of credit (HELOCS) and home equity loans. Second mortgages can be combined with a first mortgage to buy, refinance or renovate a home.
Most homeowners prefer fixed-rate mortgages because they offer the financial comfort of a stable and predictable monthly payment. The 30-year fixed-rate mortgage is the most common fixed mortgage chosen, because it allows for the lowest monthly payment spread out for the longest period of time.
First-time homebuyers with credit scores below 620 may find it easier and more cost-effective to get an FHA loan, a loan backed by the Federal Housing Administration (FHA). Homebuyers may qualify with only a 3.5% down payment and a 580 credit score. One drawback: FHA loan limits are capped at $472,030 for a one-unit home in most parts of the U.S.
A refinance mortgage is a home loan that replaces your current mortgage with a new one. Homeowners often refinance to lower their payment, pay their loan off faster or take cash-out for debt consolidation, home repairs or renovations.
Borrowers that need short term savings may choose an adjustable-rate mortgage (ARM) to take advantage of lower ARM rates for the first three, five, seven or 10 years of their loan term. The 5/1 ARM is a popular choice: The rates are typically lower than current 30-year rates for the first five years and then adjust yearly until the loan is paid off.
This specialized loan program is guaranteed by the U.S. Department of Agriculture (USDA) allows for no down payment financing to help low- to moderate income consumers buy homes in designated rural areas.
A jumbo mortgage is part of the conventional loan family, but it’s considered “jumbo” because it exceeds the conforming loan limits set by the Federal Housing Financial Agency (FHA). For a single-family loan in 2023, any loan above $726,200 in most parts of the country would be considered a jumbo loan. Expect higher down payment, and more stringent credit and debt requirements to qualify.
Mortgage calculators
Home loan calculator: Estimate your monthly mortgage payment
More Calculator Resources
How to shop for a mortgage
Once you’ve chosen a loan program, it’s time to start shopping around with some lenders. Compare mortgage interest rates from local lenders, banks, credit unions and online lenders. Ask family or friends for referrals, as well as your real estate agent. Try a rate comparison website, where lenders contact you with competing offers, saving you the hassle of doing all the work yourself. You can also work with a mortgage broker who can shop on your behalf.
Once you’ve gathered the contact information for three to five lenders, follow these four shopping steps:
- Request price quotes on the same day.
- Ask the same questions of each lender, including: When does the rate quote expire? What fees are charged upfront? Is the interest rate fixed or adjustable? What is the annual percentage rate (APR)?
- Expect loan estimates from each lender within three business days of submitting your mortgage application.
- Keep the estimates to compare rates and fees as you make your final choice.
Frequently asked questions
With just three pieces of information — your income, other debt and loan type — you can use LendingTree’s home affordability calculator to figure out how much home you can afford. Experiment with different down payment amounts and loan terms to see how homebuying might affect your budget.
How much you can afford is a personal decision, but LendingTree’s home affordability calculator can help you dial in a price range that makes sense for you.
To give a rough idea of how much you can afford, according to our calculator:
- A 28% DTI ratio is considered “conservative”
- Most lenders set a maximum DTI limit between 41% and 45%.
- A 50% DTI ratio is considered “aggressive”
You can get a mortgage with bad credit by exploring government-backed loans, which have less stringent requirements than conventional mortgages. To improve your chances, work on paying down existing debt, saving for a larger down payment and correcting any errors on your credit report.
Shopping with multiple lenders is crucial, since different lenders have varying credit score requirements and may offer different terms to someone with your financial profile.
A 780 credit score or higher will typically get you the lowest rate offers. Lenders also tend to offer lower rates if you make a higher down payment on a single-family home compared to a two- to four-unit or manufactured home.