- A mortgage is a type of loan for buying a home.
- You'll choose from a conventional or government-backed mortgage, with either a fixed or adjustable rate.
- To get a mortgage, you'll typically need a decent credit score, a low DTI, and at least a 3% down payment.
With median home prices now above $400,000, most people can't afford to buy a home all in cash. In its most recent Profile of Home Buyers and Sellers, the National Association of Realtors found that 74% of homebuyers used a loan to purchase their home.
But you can't just use any type of loan. To buy a house, you'll need to get a mortgage.
Understanding the basics of a mortgage
Definition of a mortgage
A mortgage is a type of loan used to purchase a home. When you get a mortgage, you agree that the lender can foreclose on your property if you fail to repay the loan.
This is because a mortgage is a type of secured loan. A secured loan requires you to put an asset up as collateral in case you fail to make payments.
In this case, the collateral is your house. If you don't make mortgage payments, then the mortgage lender or bank that owns your mortgage can start foreclosure proceedings, which means it can take the home from you and sell it at a foreclosure auction.
This is different from an unsecured loan, such as a student loan. Unsecured loans aren't backed by any collateral, which means if you stop paying, the lender can't take property from you. It can, however, sue you for what you owe, send you to collections, or potentially garnish your wages
How mortgages work
To get a mortgage, you'll apply with a bank or mortgage lender. To qualify, you'll need a decent credit score, a low debt-to-income ratio, and a sufficient down payment.
If you have a good credit score, you may be able to get a better interest rate, which can save you money in the long run.
Unless you qualify for a no money down home loan, you can't get a mortgage for the full purchase price of the home you're buying. This is where your down payment comes in. You'll pay at least 3% of the home's price, and the mortgage will cover the rest.
There are a variety of different types of mortgages you can get, with different term lengths and rate types. Some mortgages are paid back over just eight, 10, or 15 years, but most are set up to be paid back over the course of 30 years.
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Types of mortgages
There are several types of mortgages, but most can be broken down into two categories: conventional and government-backed mortgages.
Conventional mortgage
Conventional mortgages are offered by private lenders and are often backed by the government-sponsored enterprises Fannie Mae or Freddie Mac. These types of loans are not secured by a government agency.
Conventional mortgages typically require a good credit score and at least 3% for a down payment, though some lenders may require that you put more down.
There are two basic types of conventional loans: conforming and nonconforming.
- Conforming loan: The loan meets Fannie Mae and Freddie Mac's standards, and the loan amount is within the annual limits set by the Federal Housing Finance Agency (FHFA). In 2025, the conforming loan limit is $806,500 in most parts of the U.S. In areas with a higher cost of living, the limit goes up to a ceiling of $1,209,750.
- Nonconforming loan: A nonconforming loan doesn't meet the standards for a conforming loan. The most common type of nonconforming loan is a jumbo loan, which is a mortgage that exceeds the borrowing limit set by the FHFA. You'll need a higher credit score, a bigger down payment, and a lower debt-to-income ratio to qualify. You may also pay a higher interest rate.
Government-backed mortgage
Government-backed mortgages are offered by private lenders and are secured by a federal government agency. They typically have looser requirements surrounding credit scores, down payments, and/or debt-to-income ratios.
There are three common types of government-backed loans:
- Veterans Affairs (VA) loan: You might be eligible if you're affiliated with the military. "The VA loan is great for veterans, because it is 100% financing," says Christian Ross, managing broker for Engel & Völkers Atlanta. "There is a funding fee that goes along with that, but that can be financed in, so that you are paying that fee wrapped into your mortgage. So you can put nothing down and just pay your closing costs."
- United States Department of Agriculture (USDA) loan: You may qualify if you're buying a home in a rural or suburban part of the country.
- Federal Housing Administration (FHA) loan: An FHA loan isn't for a specific group of people, like VA and USDA loans are. But it comes with some restrictions, such as minimum property standards, that could prevent you from buying a home that isn't in great condition.
Once you've decided between a conventional and government-backed loan, you have another decision to make. Do you want a fixed-rate mortgage or an adjustable-rate mortgage?
Fixed-rate mortgage
A fixed-rate mortgage locks in your rate for the entire life of your loan.
Although mortgage rates fluctuate, you'll still pay the same interest rate throughout your entire mortgage with a fixed-rate loan. They can be especially good options if you plan to live in the home for a long time. Keeping the same rate for years gives you stability.
If you get a fixed-rate mortgage, you'll need to decide on your term length. Individual lenders may have multiple term length options, but these are the two most common:
- 30-year fixed-rate mortgage: A 30-year mortgage is the most common term length. You'll spread payments out over 30 years and pay the same rate the entire time.
- 15-year fixed-rate mortgage: You'll pay less interest on a 15-year mortgage than a 30-year mortgage because lenders charge a lower rate, and the term is shorter. As a result, you'll pay interest for a shorter chunk of time. But monthly payments will be higher than on a longer term, because you're paying off the same amount of money in half the time.
Adjustable-rate mortgage
An adjustable-rate mortgage, or ARM, keeps your rate the same for the first few years, then regularly changes over time — typically once or twice a year.
With an ARM, your rate stays the same for a certain number of years, called the "initial rate period." Then it changes periodically. The initial rate is usually lower than what you would get with a fixed-rate mortgage.
Some common term length options are 5/1 ARMs, 5/6 ARMs, or 10/1 ARMs. The numbers tell you how long your introductory period is, and how often the rate will adjust. With a 5/1 ARM, for example, your introductory rate period is five years, and then your rate will go up or down once a year for 25 years. With a 5/6 ARM, your rate is fixed for five years, and then it changes every six months for the rest of the term.
"When it comes to fixed-rate versus adjustable-rate mortgages, it really depends on your goals," says Ross.
If you can get a lower rate now with an ARM and expect to move or refinance before the initial rate period ends, it could be a good deal.
However, Ross emphasizes the importance of understanding the terms of your ARM so that you know when your rate will change and how to prepare.
Other types of mortgages
If you find yourself in a unique situation, one of the following mortgage types could be the best fit:
- Construction loan: You need money for building your own home, or for making significant renovations to the home you're buying.
- Balloon mortgage: Make small monthly payments for a set number of years, then pay off the remaining principal in one lump sum. You might like a balloon mortgage if you want low monthly payments and are confident you'll have the money for a balloon payment once the loan term is up.
- Interest-only mortgage: Only pay the interest charged on your mortgage for the first few years, then start making regular mortgage payments. As with a balloon mortgage, an interest-only mortgage could be a good option if you want low monthly payments and believe you'll be able to afford higher payments down the road.
- Reverse mortgage: If you're age 62 or older, you can receive the equity you've built in your home as cash — in a lump sum, in monthly installments, or as a line of credit.
- Non-QM loan: Non-qualified mortgages, or non-QM loans, are a type of mortgage available to borrowers with unusual situations that prevent them from qualifying for other mortgage types. These loans are often marketed to self-employed borrowers, those who have recent bankruptcies or foreclosures, or others who might have trouble qualifying for a traditional mortgage. They often have high interest rates to account for the risk of the loan.
Key components of a mortgage
To truly understand a mortgage, you need to grasp its individual components first — and there are quite a few. These include:
Principal
The principal is the amount the lender gives you upfront. If you borrow $200,000 from the bank, then the principal is $200,000. You'll pay a little piece of this back each month.
Interest rate
This is the cost of your loan. The interest is built into your monthly payment.
Loan terms
The loan term is how long your loan is. A 30-year mortgage, for instance, has a 30-year term. Your balance and interest is spread out over 30 years — or 360 months — and you have 30 years to pay it off.
Down payment
This is like a deposit on your home. The bigger the down payment you make, the less you have to borrow and the lower your monthly payment is. You'll usually get a lower interest rate, too.
Mortgage insurance
Depending on the size of your down payment and the type of loan you get, you may need to pay for mortgage insurance. Conventional loans require private mortgage insurance with down payments below 20%. You'll pay this premium as part of your monthly mortgage payment. FHA loans always require mortgage insurance. FHA mortgage insurance, also called a mortgage insurance premium (MIP), is paid both up front and on a monthly basis.
VA loans don't have mortgage insurance, but you will need to pay an upfront funding fee. Similarly, USDA loans don't require mortgage insurance but instead charge an upfront and annual guarantee fee.
Monthly payments
You'll make monthly payments on your mortgage, and various expenses make up a monthly payment. This is often abbreviated as "PITI," or principal, interest, taxes, and insurance. Insurance includes both homeowners insurance and, if applicable, mortgage insurance.
The mortgage application process
When you're ready to get a mortgage, you'll need to find a lender and apply for your loan. While the exact process varies by lender, generally speaking, here's how to apply for a mortgage:
Pre-qualification
This is the first step in getting a mortgage and is sometimes called pre-approval. You'll provide the lender with some basic information about your home purchase and finances, and the lender will estimate what you can borrow and at what rate. You also may need to agree to a credit check for this step.
Documentation required
You'll next fill out a more detailed application and provide financial documentation. The documents needed for a mortgage include things like W-2s, tax returns, pay stubs, bank statements, and more. Your lender will use these to verify your income, debts, assets, and other financial details.
Approval process
Your loan then moves into underwriting, where the lender will double-check your finances and ensure you are in a place to afford the mortgage you're looking to borrow. It will then approve your loan and give you a closing date.
Closing costs
When you attend closing, you'll need to hand over your down payment and any closing costs that are due. These generally range from 2% to 6% of your loan amount, but can vary widely based on your lender and where you're located. Your lender will give you a form that outlines these costs before closing.
Benefits and risks of mortgages
As with any financial product, there are both pros and cons to mortgage loans. Here are the ones you'll want to consider:
Benefits
The big benefit of using a mortgage is that it allows you to spread the costs of your home across many years. This opens up the door to homeownership for those who can't afford to buy a house with cash.
Mortgage loans also qualify you for certain tax benefits, and they act as a forced savings account, allowing you to build equity with every new payment you make.
Finally, having a mortgage — and making your payments on time each month — can help your credit score. The longer you have the loans and the more you stay on top of payments, the more the benefit.
Risks
Mortgages come with some drawbacks to consider, too. For one, they use your home as collateral, so if you fail to make your payments, you could lose the roof over your and your family's heads.
It's also a large-sized debt, and it could be many, many years until you've paid it up. This could make it hard to achieve other financial goals you have.
Last but not least, there's the interest you'll pay. While mortgage loans typically have interest rates much lower than other financial products, they still charge interest. And on loan balances that easily reach into the hundreds of thousands, that interest adds up in the long haul.
Tips for choosing the right mortgage
There are lots of mortgage options to choose from, so doing your research is critical. Here's how to get the right one for your needs:
Comparing mortgage rates
You shouldn't necessarily just apply with your personal bank. Find a lender that provides the type of mortgage you need. Then, shop around for a lender that offers you the lowest rates, charges you the least in fees, and makes you feel comfortable.
Ross recommends getting referrals from friends or your real estate agent to narrow down your options. And just because your agent recommends a lender doesn't necessarily mean there's a conflict of interest.
"A lot of times, there's a good working relationship," she says. "Just make sure that you receive at least three recommendations."
If you're early in the homebuying process, apply for prequalification or preapproval with several lenders to compare what they're offering.
Understanding your credit score
Each type of mortgage requires a different credit score. Requirements can vary by lender, but you'll probably need a score of at least 620 for a conventional mortgage. You can increase your score by making payments on time, paying down debt, and letting your credit age.
Keep in mind that higher credit scores will make it easier to get a mortgage — and can qualify you for lower interest rates.
Seeking professional advice
Your loan officer can answer any questions you might have along the way, or you can also consider using a mortgage broker for your loan. These professionals can help you compare several lenders and loan options at once, pinpointing the best one for your needs and budget. They typically get paid a commission by the lender you eventually choose.
What is a mortgage FAQs
A mortgage is a loan used to purchase a home. The property being purchased serves as collateral and can be seized if you don't make payments.
Common types of mortgages include fixed-rate, adjustable-rate, FHA, VA, conventional, and jumbo loans.
To figure out how much mortgage you can afford, take a look at your monthly expenses and think about what you can afford to pay without straining your budget. A mortgage calculator can help with this.
Yes, you own the house even if you used a mortgage to purchase it. Mortgages give lenders the right to foreclose on your home if you stop making payments, but you are still the owner of the home.
To get a mortgage, you'll complete an application with a mortgage lender and provide documentation showing that your finances can handle the loan. Be sure to apply with multiple lenders to compare offers.
