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Everything you need to know about mortgage rates and loans

How to Get a Home Mortgage

If you’re thinking about buying a home, you may be wondering, “How much house can I afford?” The answer isn’t simple, and it depends on how much money you can borrow. By familiarizing yourself with the process of taking out a home mortgage, you can figure out how much home you can afford. You also can discover how to find the best lender for your particular situation and get the best rate.

So, the question now is: What is a home mortgage? A home mortgage is a loan used to purchase a house, a condo or any other type of residential property that will be used as a primary residence or for investment — like a rental, second home, etc. Many factors go into determining the loan amount and terms, including the home’s sales price and location, your down payment, the current interest rate, and the length of the loan.

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Loan Types

Government-backed or conventional

Loan Terms

15-year or 30-year term

Loan Rates

Fixed or adjustable

Down Payment

As low as 3%; 20% to avoid insurance; 0% down programs from the VA and USDA

Types of Home Loans

There are two main types of home loans:

Conventional Loans

Conventional loans are not backed by the government, but conform to standards set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac. They are typically better suited to borrowers with good or excellent credit profiles.

  • Down payment.  Typically 20 percent, although some conventional loans now require only 3 percent down.
  • Private mortgage insurance.  Required if the down payment is less than 20 percent. Mortgage insurance typically can be cancelled after the loan-to-value ratio reaches 80 percent.
  • Eligibility.  Conventional mortgages typically require a credit score of at least 620, although the exact minimum varies by lender.

Government-Backed Loans

These are loans insured by the U.S. Department of Veterans Affairs (VA), Federal Housing Administration (FHA) or U.S. Department of Agriculture (USDA). This government backing allows lenders like banks and credit unions to approve mortgages for borrowers with riskier credit profiles.

FHA

FHA Loans

Down Payment
As low as 3.5%
Mortgage Insurance Premium
Required if below 10% down.
Eligibility
Minimum credit score of 580, although lenders may require a higher score.
VA

VA Loans

Down Payment
As low as 0%
Mortgage Insurance Premium
Not required
Eligibility
Available to active-duty service members, veterans and reservists, as well as spouses.
USDA

USDA Loans

Down Payment
As low as 0%
Mortgage Insurance Premium
Not required
Eligibility
Home must be in an eligible rural area.

Each of these loan types is offered through banks and other lenders, including big names you may be familiar with, such as Chase, Wells Fargo, Bank of America, U.S. Bank and Quicken Loans. You also may be able to take out a mortgage from a small community bank or credit union, or a mortgage bank that specializes in mortgages. Search and compare lenders to find a lender that caters to your specific needs.

Typically, mortgages with down payments of less than 20 percent will require the borrower to purchase mortgage insurance. For FHA loans, such insurance is called a Mortgage Insurance Premium (MIP). For conventional loans, it is called Private Mortgage Insurance (PMI).

Borrow Wisely Tip

How to Avoid PMI

mortgage insurance papers

  • Make a down payment of at least 20 percent. So your loan-to-value ratio doesn't exceed 80 percent.
  • Consider a VA or USDA home loan, if you qualify. Neither program requires mortgage insurance.
  • Consider a piggyback loan. Get two loans: one to cover 80 percent of the home’s value, and a second to put toward a 20 percent down payment.
  • Ask the lender to foot the bill. They may pay for PMI, but also charge you a higher interest rate

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Understanding Mortgage Rates and Terms

When you buy a house, you want to get it for the best possible price. But it’s important to look beyond the list price. Your home-loan rates can have a huge impact on the price you ultimately pay for your home.

Many factors determine your mortgage rate, including the amount of the down payment, the borrower’s credit score and the loan term. In addition, rates vary based on whether you select a fixed-rate mortgage or adjustable-rate mortgage (ARM).

  • Fixed-rate vs. ARM. A fixed-rate mortgage offers a consistent interest rate throughout the life of the loan. An ARM — short for adjustable-rate mortgage — may offer a lower initial interest rate than a fixed-rate mortgage. When the fixed-rate period ends, the interest rate could increase significantly.
  • Down payment. Typically, a lower down payment results in a higher interest rate, while a higher down payment results in a lower rate.
  • Credit score. Your credit score can impact your mortgage rate. Borrowers with higher scores are offered lower interest rates, and borrowers with lower scores are offered higher interest rates. Typically, a credit score of 740 or more commands the most favorable rates, while borrowers with scores less than 620 have the most difficulty getting approved for a mortgage and — if they are approved — usually pay higher interest rates.
  • Loan term. Shorter-term loans tend to have lower interest rates than longer-term loans, but also result in higher monthly payments.

Points are another factor that can influence the interest rate on your home loan. Points are upfront fees borrowers pay to lower their interest rate. Points are best for borrowers who intend to live in their house for a long time. If you think you will sell the house in the near future, the upfront fees may not save you that much in interest.

Another way to get the best home loan rate is comparison shopping. Contact lenders to get and compare personalized rate quotes.

Fixed-Rate vs. ARM

The primary advantage of a fixed-rate mortgage over an ARM is consistency: the interest rate is set once the loan is funded, resulting in a mortgage payment that is the same for the life of the loan (unless you refinance the mortgage, which could result in a lower monthly payment).

On the other hand, an ARM has a fixed interest rate only for a certain period of time, usually between 3 and 7 years. After that, the interest rate can change. Although it is possible the interest rate could lower, there is a good chance the interest rate could increase.

Fixed-Rate Mortgage
  • Consistent interest rate
  • Consistent payment amounts
  • Better if staying in house long-term
Adjustable-Rate Mortgage (ARM)
  • Fixed rate initially, then variable
  • Payments fluctuate with interest rate
  • Better if occupying house for short time period

15-Year vs. 30-Year Mortgages

Most mortgages are paid off over either 15 years or 30 years. Each loan term comes with its own advantages and disadvantages.

15-Year Mortgage
  • Higher monthly payments
  • Pay off the loan sooner
  • Pay less interest over life of the loan
30-Year Mortgage
  • Lower monthly payments
  • Takes longer to pay off
  • Pay more interest over life of the loan

What Is a Down Payment?

A down payment is an upfront payment paid to the lender at the close of a loan. A standard down payment amount is 20 percent, although many programs now exist offering mortgages with down payments as low as 3 percent. VA and USDA loans offer zero-down mortgages for eligible borrowers.

If you’re struggling to save up enough money for a down payment, you’re not alone. In fact, a variety of state and local governments and nonprofits offer down payment assistance to help borrowers purchase a home. Read more about down payment assistance.

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Get Prequalified or Preapproved

Are you asking yourself, “How much home can I afford?” When this question first pops up, you may not know how to find the answer. Getting prequalified or preapproved for a mortgage can be a good starting point. But what’s the difference between the two?

Both mortgage prequalification and mortgage preapproval are ways for lenders to let you know approximately how much money you can borrow from them. But each process is a little different.

Prequalification is a more preliminary process than preapproval. Typically, lenders only perform a soft credit check when they do a prequalification, if they check your credit at all. Such a credit check won’t have any impact on your credit score.

For a preapproval, lenders perform a more rigorous check of your finances and may perform a hard credit check, which will have some impact on your credit score, although it should be relatively small. You will likely fill out an application, and the lender will approve you for a specific loan amount.

Neither prequalification nor preapproval is a promise to lend you that amount of money, however. A lender will not commit to lending you money for your home purchase until you have selected the home you plan to buy and the lender has approved it.

Preapproval vs. Prequalification

Prequalification
  • Soft credit inquiry (won’t affect credit score)
  • Preliminary process
  • Less documentation required
Preapproval
  • Hard credit inquiry (will affect your credit score)
  • More rigorous
  • More documentation required

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First-Time Homebuyers Checklist

Buying a house is a complicated process — one that can make even a veteran homebuyer’s head spin. If you’re a first-time homebuyer, you may feel overwhelmed. We’ve compiled a checklist of the steps you should take as you search for first-time homebuyer loans.

  •  Figure out how much home you can afford. It’s important to know how much money a lender will give you to purchase a home. Otherwise, you could set your sights on a house out of your price range, only to discover once you apply for a loan that you don’t qualify. Getting prequalified or preapproved ahead of time will give you an approximate idea of how much house you can afford.
  •  Improve your credit. Before you apply for a home loan, check your credit. If your score is low, it’s probably worth taking some time to improve it, as this can increase your chances of qualifying for a loan, and earn you a more favorable interest rate. Obtain copies of your credit report from the three major credit reporting bureaus and check for errors. If there are errors on your credit report, you can dispute them.
  •  Save up for a down payment. One of the most important steps in the home buying process is saving up a down payment, or obtaining one through a down payment assistance program. Unless you’re obtaining a zero-down home loan through the VA or USDA, you will need to put down at least 3 percent of the purchase price. It’s beneficial to pay more — if you make a 20 percent down payment, you won’t have to pay for mortgage insurance.
  •  Compile the required documents. Mortgage applications require a lot of documentation. This can include pay stubs, W2s, bank statements and tax returns. Find out what specific documents your lender needs, and start getting them together early in the process.

Bad Credit or Low Income?

Home Loans for Bad Credit

If your credit has seen better days, you may be wondering if there are any home loans for bad-credit borrowers.

Many government-backed loans are accessible to borrowers with less-than-ideal credit. FHA loans, for example, accept borrowers with scores as low as 580 with a down payment of 3.5 percent (although the actual credit requirements vary by lender). Borrowers with scores less than 580 may still be able to take out an FHA loan if they make a 10 percent down payment.

Home Loans for Low Income

If you are a low-income borrower, homeownership may seem forever out of reach. It is possible to get approved for a home loan if you have low income, however.

Options include FHA and USDA loans as well as VA loans if you, or your spouse, have served in the military. All of these loans are backed by the government, which allows private lenders to fund loans they may not be able to fund otherwise.

The USDA also offers direct loans for low or very-low income homebuyers who are without “decent, safe and sanitary” housing. Read more about USDA loan income requirements. In recent years, conventional loan products geared toward low-income homebuyers have become available. Both Fannie Mae and Freddie Mac offer mortgages that cover up to 97 percent of the cost of the home.

Another resource for low-income borrowers is down payment assistance programs. These are programs, often administered by state or local jurisdictions, that assist first-time or low-income homebuyers with a down payment, subject to eligibility requirements.

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