Introduction to Purchase Mortgages

Buying a new home marks a milestone in life, and securing a purchase mortgage can help get the financing you need to make this dream a reality. Even if you don’t have the cash upfront, you can use a purchase mortgage to cover the costs to buy a home. To get the best deal, you’ll want to make sure you understand the ins and outs of a home loan first.

A home loan, or purchase mortgage, is a loan provided by a lender to purchase a home, plot of land, or other types of real estate. The home serves as collateral for the loan. Borrowers pay back the loan amount plus interest over a set period, typically 15 to 30 years. Payments are usually monthly and include a portion toward the loan principal and interest. Failure to make payments can result in foreclosure, in which the lender takes possession of the home.

Understanding a purchase mortgage can help homebuyers make smart financial decisions and potentially save money over time. You’ll want to consider factors like the loan terms, required monthly payments, length of your mortgage, and the current market interest rates to get the full picture of the costs involved. This way, you’ll have a clear idea of your budget as you proceed with the homebuying process.

Types of Purchase Mortgages

There are a variety of mortgage loans, and each has its own terms and eligibility requirements. Exploring your options can help make the right financial choice when it comes to purchasing your home.

Conventional Loans

Conventional loans are common types of mortgages, not guaranteed by a government institution. Although they cost less than an FHA-government backed loan, they also tend to have more difficult requirements to qualify.

Most conventional loans require a 620 or higher credit score needed to buy a house. Higher scores secure the best mortgage loan rates and loan terms, saving you money in the long run.

FHA Loans

An FHA loan is a mortgage insured by the Federal Housing Administration, designed to help lower-income borrowers afford a home. It allows for lower down payments and more lenient credit requirements compared to conventional loans.

FHA loans may accept scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment. Improving your credit score for a mortgage before applying can help obtain the best mortgage interest rates.

VA Loans

In the United States, a VA loan is a mortgage loan guaranteed by the Department of Veterans Affairs (VA). It offers long-term financing to eligible American veterans or their surviving spouses (provided they do not remarry). This type of veterans mortgage helps purchase primary residences without requiring a down payment or private mortgage insurance.

Those eligible for a VA home loan include:

• Active duty service members
• Veterans
• Certain members of the National Guard and Reserves
• Surviving spouses of service members who died in the line of duty or as a result of a service-related disability
• Eligibility is based on service length and duty status

USDA Loan

USDA loans are government-backed, affordable mortgage loans offered through the United States Department of Agriculture (USDA). These loans are specifically designed to help low- and moderate-income families purchase or rehabilitate homes in rural areas. They are often offered with lower interest rates than other types of loans, making them a great option for those looking for an affordable mortgage loan. In addition, they often require no down payment and have lower closing costs than other types of mortgages.

Understanding Mortgage Rates

Deciding to take out a home mortgage depends on market conditions, mortgage interest rates, and personal financial stability. Mortgage rates can fluctuate year to year and also depend on the length of your mortgage and state of residence. Evaluate the broader economic environment and personal readiness before deciding whether or not a home loan is right for you.

When the current interest rates are low, it's generally a good time to consider a home mortgage as borrowing costs are lower. However, you should also consider your job security, credit score, debt owed, and readiness for homeownership.

Keep in mind that having a downpayment of at least 20% will save you thousands of dollars by not paying Private Mortgage Insurance (PMI) each month. It’s a smart way to save money; if you have enough cash for a large enough down payment, it will reduce the costs of paying PMI on top of your monthly mortgage payments.

In addition, owning a home comes with costs beyond just purchasing the home itself. You’ll want to have savings to cover real estate fees, closing costs, home improvements, potential repairs, and so on. Make sure to calculate total costs and potential unexpected expenses before moving forward.

What Is a Fixed Rate Mortgage vs a Variable Rate Mortgage?

Mortgage loans commonly come in two forms: fixed rate and variable rate. The main difference is that a variable rate mortgage fluctuates periodically based on the market, while a fixed rate mortgage locks in the rate.

Fixed Rate Mortgage:

• Interest rate remains the same throughout the loan term
• Predictable monthly payments
• Ideal for long-term stability

Variable Rate Mortgage:

• Interest rate can change based on market conditions
• Monthly payments can increase or decrease
• Potentially low mortgage rates initially but with uncertainty over time

The Mortgage Application Process

Applying for a mortgage loan has become easier than ever, especially now with much of the process taking place online. You can conveniently find mortgage lenders online and compare rates and terms to obtain the best deal for your financial situation.

Pre-qualified vs Pre-Approval for a Mortgage

Pre-qualified

• An estimate of the amount someone can borrow
• Uses data provided by the borrower
• Accuracy depends on submitting the correct data to the lender
• Typically handled online or over the phone for free
• Doesn’t include a credit report

Pre-approval

• Provides a concrete assessment of how much a person can borrow
• Speeds up the process of purchasing a home
• Requires a mortgage application and specific financial documents

It can help to pre-qualify for a loan to get an idea of the amount of money you are qualified to borrow. During the pre-qualification process, the borrower submits data to the lender to get a ballpark estimate of the available loan amount. When you go through this step, make sure to provide data as accurately as possible, as that will give you a clear idea of how much money you can actually borrow for the home.

Mortgage preapproval is a lender's commitment to lend you a specific amount under certain terms before you find a home. It involves reviewing your financial background—credit score, income, debts, and assets. Home loan preapproval shows sellers you're a serious and capable buyer, giving you a competitive edge, especially in hot markets. It also helps you understand how much you can afford.

Getting pre-qualified gives you a rough idea of your loan amount, while pre-approval provides a more accurate assessment of how much you can actually borrow. During this stage, you’ll submit a series of financial documents so the lender can correctly determine the qualified loan amount based on total income, debt, and assets. You may also get a better idea of your mortgage interest rate and possibly lock in a better rate with the lender.

To speed along the application process, it helps to prepare financial documents usually requested by online mortgage lenders. Common documents needed during the mortgage application process may include:

• Identification
• Bank statements
• Tax returns
• Income verification
• Credit report
• Assets report
• Pay stubs

What Do I Need to Qualify for a Home Loan?

While home mortgage providers vary, typically you should expect to meet the following requirements to qualify for home loans:

• Stable Income: Proof of steady employment and income
• Good Credit Score: The higher, the better for loan terms
• Low Debt-to-Income Ratio: Typically below 43%
• Down Payment: Minimum depends on loan type; 20% is standard to avoid PMI
• Financial Documents: Tax returns, bank statements, and other financial details

What Is the Mortgage Underwriting and Appraisal Process?

When you apply for a mortgage, lenders will go through an underwriting process to assess if you qualify for the loan. This step can take anywhere from a few days to a few weeks to complete. During this time, underwriters will order a home appraisal to check if the asking price of the home is in line with its determined value. They’ll look at your financial situation and compare that to the appraised value of the home.

Choosing the Right Mortgage Lender

Many reputable mortgage providers can help put you on the path toward buying a home. Exploring your options will help find the right mortgage lender for your situation.

When it comes to a home loan, mortgage lenders can vary in their offerings. In order to get the most affordable loan, with lower interest rates, fewer fees, and flexible terms, consider the following when shopping around for a lender:

• Loan Rates: Low mortgage rates can save you money over the loan term.
• Closing costs and fees: Understand all fees, including origination, application, and any hidden charges.
• Reputation: Choose a home mortgage lender with good customer service and reliability.
• Loan Terms: Compare mortgage rates and terms, including length of loan and flexibility in payments.
• Prepayment Penalties: Avoid lenders that penalize for early repayment.
• Understanding APR and Total Loan Costs

What Is APR?

APR (annual percentage interest rate) is the interest rate charged per year on your mortgage. Mortgage APRs usually range between 3% to 7%, depending on the loan amount, length, and financial situation of the borrower. APR may fluctuate periodically in the case of a variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage based on an index which reflects the cost to the lender of borrowing on the credit markets.

APR gives you a better idea of the real cost of the loan than interest rates. That’s because APR includes fees, which gives you a fuller picture of how much you'll actually pay.

How Does the Length of a Mortgage Loan Affect the Total Cost?

The length of time to repay your loan depends on the terms negotiated between you and the lender. For example, if you have a 30-year loan of $200,000 with a 3.5% interest rate, you would pay approximately $123,000 in interest over the life of the loan. If you cut your term in half to 15 years through refinancing, you would pay about $57,000 in interest over the life of the loan.

Mortgage Rate Locking

Interest rates go up and down. So, if you’re purchasing a home with a mortgage, it may make sense to lock in a lower mortgage rate to protect you from these fluctuations. Also known as rate protection, a mortgage rate lock can help secure the rate on your mortgage loan for a set period of time. The lock period can last anywhere from 30 to 120 days, depending on the lender. Some lenders may offer a rate lock for free, while others may charge a fee of 0.25% to 0.5%.

Tips for First-Time Homebuyers

Start saving early.

You’ll want to save as much money as possible to cover all the costs that come with buying a home. The more you save the better, as paying at least 20% avoids having to pay monthly Private Mortgage Insurance (PMI). Make sure to include moving costs, closing fees, and home repairs into your budget.

Keep a healthy credit score.

Good credit helps qualify for the best mortgage rates. Steps like paying off debt, longer credit history, and paying bills on time can help keep credit score ratings higher, so you can qualify for lower rates on your mortgage.

Apply for First-Time Homebuyer Programs

Low to moderate-income buyers may qualify for certain programs to help purchase a home for the first time. Check for available first-time homebuyer initiatives that may help cover costs of a down payment and closing costs.

Explore mortgage options.

There are many lenders out there who can help secure a mortgage loan. Each has their own terms, fees, and benefits. Compare different lenders to find the best option for you. You should also consider the different types of mortgage loans and loan terms that make sense for your budget.