Written by Dan Green
Dan Green
Dan Green (NMLS 227607) is a licensed mortgage professional who has helped millions of people achieve their American Dream of homeownership. Dan has developed dozens of tools, written thousands of mortgage articles, and recorded hundreds of educational videos. Read more about Dan Green.
This website discusses mortgage programs and how to qualify. Your eligibility may vary based on lender guidelines and investor overlays. Check with your lender for specific details.
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This article was checked for accuracy as of October 2, 2024. Learn more about our commitments to accuracy and your mortgage education in our editorial guidelines.
Updated: October 2, 2024
For renters, there are more ways than ever to buy your first home.
The government has expanded its low- and no-down payment mortgage coverage, and several bills in Congress propose grants and federal tax credits to first-time home buyers.
This Mortgage 101 guide explains concepts, strategies, and action plans you’ll need to stop renting and start owning.
A mortgage is a loan used to finance a home.
87% of home buyers use mortgages to buy homes. Mortgages are popular because few home buyers have hundreds of thousands of dollars in their bank account.
The majority of mortgages pay off over 30 years.
Before we go deep into your mortgage education, let’s review a few key mortgage terms:
Mortgage loans are like other loans in your life. You borrow some amount, you get an interest rate at which to pay it back, and there’s a schedule to make your monthly payments.
Mortgage payments are due on the first of each month. Lenders grant a 15-day grace period, then late fees are assessed. Many homeowners use their lender’s autopay features to prevent late payments.
You don’t need a bank account or a pre-existing banking relationship to get a mortgage loan. You can get a mortgage loan at any of the following places:
Learn more about the differences between mortgage lenders, brokers, and banks.
It’s always good to start your application early — even before you find your first home.
Studies show that home buyers who learn about mortgages get lower rates than those who do not. Educated buyers often pay fewer closing fees, too.
The U.S. government created the modern mortgage market in the 1930s. Today, there are five basic mortgage types, each with different qualifying rules.
Let’s look at all five options.
Conventional loans are usually best for home buyers with salaried or hourly income, some amount of money saved up, and good credit. Conventional loans require a minimum three percent down payment. For smaller down payments, private mortgage insurance (PMI) may be required.
Eighty-one percent of first-time home buyers use conventional mortgage loans, so you probably will, too.
FHA loans are a fallback option for first-time buyers who fall short of the conventional loan requirements. FHA mortgages allow down payments as low as 3.5 percent and credit scores down to 500.
Approximately 10 percent of first-time home buyers use FHA mortgage loans. They’re popular with home buyers who purchase multi-unit homes for house hacking.
VA loans are loans backed by the Department of Veterans Affairs. Created as part of the G.I. Bill in 1944, VA loans are available to current and past members of the U.S. military. VA loans don’t require a down payment nor mortgage insurance.
Certain veterans are exempt from standard VA closing costs.
USDA loans are guaranteed by the U.S. Department of Agriculture and designed to promote homeownership in rural and low-density areas. USDA loans are 100 percent mortgages with subsidized interest rates. Home buyers must be of modest means to use the program and purchase a modest home for the area.
Portfolio loans are loans that mortgage lenders make and hold on their balance sheets (i.e., in their portfolios). Government groups don’t back portfolio loans so mortgage guidelines vary by lender. Each lender makes its own rules. Jumbo mortgages are a type of portfolio loan. In general, getting a portfolio loan requires better-than-average income and credit.
See home loans for first-time buyers.
Twelve factors make up your mortgage rate.
Some factors are within your control, such as the state in which you buy your home and your FICO credit score. Other factors are outside your control, such as Wall Street’s attitude on mortgage markets.
The starting point for all mortgage rates is a Wall Street instrument called mortgage-backed securities (MBS).
Mortgage-backed securities are bonds that trade Monday through Friday, from 8:00 AM to 4:00 PM ET. As bond prices change, so do mortgage rates, and bond prices are unpredictable.
However, mortgage bonds are denominated in U.S. dollars, so there are two basic rules:
During periods of low inflation and political stability, the U.S. dollar tends to be strong. That’s good for U.S. mortgage rates. Economic instability, on the other hand, is not.
Mortgage lenders reserve the best mortgage rates for home buyers with high-tier credit scores — 740 and higher. Then, for every 20 points that your credit score drops, mortgage rates often edge higher.
Your mortgage rate is also affected by:
The price of mortgage-backed bonds, which are securities bought and sold on Wall Street, determine mortgage rates. Mortgage rates can change anytime the mortgage-backed bond market is open.
Mortgage rates change at least once daily — at the market open. Rates change again when markets are volatile. Several times in the last few years, mortgage rates changed five times in one day, which is challenging to navigate.
When mortgage rates change, open offers for mortgage rates expire. A lender won’t give you yesterday’s rates like a stockbroker won’t give you yesterday’s stock price.
So, when you get a mortgage rate offer you’re comfortable with, lock it.
Over the life of the loan, the interest rate on a fixed-rate mortgage doesn’t change — the interest rate on an adjustable-rate mortgage (ARM) can.
For many home buyers, adjustable-rate mortgages are inappropriate. Hence, fewer than five percent of buyers used ARMs over the last ten years.
Here’s how most ARMs work.
ARMs may show savings in their first few years, but those savings can change once the teaser period ends.
Rules govern ARM interest rates. They can only move a few percentage points per year and can never move more than six points in their lifetime.
| Fixed-Rate Mortgage | Adjustable-Rate Mortgage |
| Interest rate never changes | Interest rate changes expires |
| Mortgage payments are predictable | Mortgage payments are unpredictable |
| May have lower mortgage fees | May have a lower beginning mortgage rate |
A mortgage pre-approval is a dress rehearsal for your actual mortgage approval. Pre-approvals serve three critical functions.
Mortgage pre-approvals are valid for 90 days.
Getting pre-approved for a mortgage is different from getting pre-qualified for one.
When you get pre-approved, a mortgage lender reviews your income, assets, and credit report as if you were purchasing an actual home at a specific sale price.
Mortgage pre-approvals are as close as possible to an actual mortgage approval without making an offer.
By contrast, pre-qualifications are far from being approved.
Pre-qualifications are like credit card offers in your mailbox. There are no verifications or little quality control. Pre-qualifications are worthless PDFs, and sellers don’t accept them as evidence that you’re credit-worthy.
https://youtube.com/watch?v=fKDJkshvvCs
Getting a mortgage approval is a cinch after you’re pre-approved.
The specific items you’ll need for your approval will vary based on your mortgage type and how you’re employed. For example, conventional mortgages may ask for two recent pay stubs to show evidence of income. Portfolio mortgages may ask for copies of your federal tax returns.
If you’re salaried, your lender may call your employer to verify your employment. If you’re self-employed, you may be asked to provide an updated profit-and-loss statement with evidence you’re still in business.
If you meet the following criteria, your mortgage approval will usualy be quick and inexpensive.
Your mortgage approval may require evidence of assets, landlord contact information, recent W-2s, tax returns, and more if these trait don’t describe you.
Your mortgage lender will make a mortgage approval checklist for you. Most mortgage loans are approved in a few days.
Mortgage loan limits are the upper bounds at which government-backed mortgage groups back U.S. buyers.
Loan limits vary by U.S. county and are expressed in dollar terms. Mortgage loan limits are lower in areas where home prices are more affordable. They’re higher in areas with higher home prices.
They also vary by home type.
A one-unit home such as a detached single-family residence or condominium will have a lower mortgage loan limit than a 2-unit home in the same state and county.
Nationwide, there are 3,233 designated counties. The FHFA 2024 conventional mortgage loan limits are:
The remaining five percent of counties are High-Cost Areas. Loan limits can range as much as 25 percent higher in cities including San Francisco, Los Angeles, and New York City.
Mortgage loan limits are reviewed and updated annually, usually during the last week of November. New loan limits go into effect on January 1 each year.
Mortgage loans exceeding local loan limits are known as jumbo loans. These fall into the category of portfolio mortgages.
You can buy a home with no official credit rating. Still, the best mortgage rates are for buyers with high credit scores and an excellent financial history.
| Minimum Credit Score by Loan Type | |
| Conventional Loan | 620 |
| FHA Loan | 500 |
| VA Loan* | 580 |
| USDA Loan* | 620 |
| Jumbo Loan | Varies by Lender |
| *No official credit score minimums. Minimums enforced by lenders. | |
Mortgage credit scores are different from auto loan credit scores or Credit Karma scores. Mortgage credit scores are based on an algorithm called the FICO model, which is why lenders refer to your score as a FICO.
Your FICO score is a probability statistic scored from 300-850. The higher your score, the more likely you will make on-time payments for the next 90 days. And, if you know how the system works, you can boost your score to get a lower rate.
Your credit score considers five components:
Payment history and credit utilization account for 65 percent of your overall score. The best way to boost your credit is to pay your bills on time and keep your credit usage down.
Your credit behavior changes will reflect in your score after 30 days, then again after six months. You can increase your score by 100 points or more with diligent effort. Raising your score one hundred points can lower your mortgage rate by one percentage point or more.
https://youtube.com/watch?v=5M4FQOpLwUI
Now that you’ve learned the mortgage basics, here are answers to other common questions:
Mortgage loans are approved considering affordability and don’t have specific salary requirements.
In general, you may qualify for a mortgage so long as you’re not obligating more than 40-45 percent of your household’s monthly gross income to debt. There are exceptions to this guideline.
The 30-year mortgage term is the most popular choice for affordable monthly payments. A 15-year term is also suitable for long-term financial savings and a lower interest rate.
Consult with a mortgage lender to determine which loan term best fits your situation and financial goals.
Mortgage pre-qualification isn’t as desirable as pre-approval. Pre-approvals include a credit check and prove your buying power to sellers. Pre-qualifications can provide insight into your financial situation but won’t help you buy a house.
Neither status is a guarantee of loan approval.
Mortgage insurance protects your lender if you’re unable to meet contractual obligations. Mortgage insurance may be required depending on your loan choice, down payment, and lender.
There are four types of mortgage insurance available to choose from. Contract length and payment options vary by contract.
A co-borrower owns an equal part of the property along with the buyer. Cosigners hold no homeownership. Learn more about using a mortgage cosigner to buy a home.
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What is a Starter Home?
For renters, there are more ways than ever to buy your first home. The government has expanded its low- and no-down payment mortgage coverage, and several bills in Congress propose grants and federal tax credits to first-time home buyers. This Mortgage 101 guide explains concepts, strategies, and action plans you’ll need to stop renting and […]
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