What Is a Mortgage Loan? Types, How They Work, How To Get One

Turbo Takeaways

A mortgage loan is a secured loan backed by real estate. When you get a loan to purchase a home, the lender takes a lien on your home. This means that If you don’t repay the loan, the lender can foreclose, repossess the home, and sell it to recover their money if you don’t repay the loan as agreed.

Your home is likely your largest asset, and since mortgage debt is significant for most people, it’s essential to understand how the loan works.

Keep reading to learn what a mortgage loan is, its types, eligibility requirements, and interest rates to help you make an informed decision before applying.

​​What Is a Mortgage Loan?

Home mortgage loans are used to purchase a home. You borrow money from a lender to purchase real estate and agree to pay it back over time with interest in a series of regular payments over a set term. The property you purchase is then used as collateral for the loan.

Financing a house requires you to meet several mortgage requirements, including a down payment amount, minimum credit score, debt-to-income (DTI) ratio, and more. Your application will go through an underwriting process before it’s finalized.

Mortgage Loan Options

Real estate loans come in many forms. 15-year and 30-year fixed-rate mortgages are usually the most common, but you can also get shorter terms, as well as 40-year mortgages if you prefer. Other than fixed-rate loans, you can also opt for adjustable-rate mortgages (ARMs).

Borrowers can also choose government-backed loans for buying a house, such as VA loans (U.S. Department of Veterans Affairs), FHA loans (Federal Housing Administration), and USDA loans (U.S. Department of Agriculture).

Interest Rates and Terms

How much you’ll need to pay for a mortgage loan will depend on whether you have an adjustable or fixed loan, interest rates, and loan terms. With a fixed interest rate, your mortgage payments will remain the same throughout the term. 

With an adjustable-rate mortgage (ARM), the interest rate isn't fixed and can change over time. It may increase or decrease based on overall interest rate trends, impacting your payments as it adjusts each year.

A longer loan term can keep your monthly payments lower, but you’ll pay more in interest over the life of the loan. For this reason, it’s important to shop around carefully.

Mortgage loan rates can vary from one week to the next, but here’s a look at the current mortgage interest rates as of March 11, 2025, for different types of home mortgages.

Closing Costs and Fees

Other than interest rates, taking out a mortgage loan and purchasing a property come with additional expenses. These closing costs include fees for title search, loan document processing, title insurance, market value appraisal, and loan origination.

You’ll pay for these costs on the closing date when signing the final documents. Closing costs are typically 3% to 6% of the mortgage amount. You’ll also need to account for additional expenses, such as HOA fees, mortgage insurance premiums, homeowners insurance, and property taxes.

“Don’t forget, as part of your mortgage loan payment, you will likely have to pay private mortgage insurance (PMI) if you can’t put at least 20% down on the purchase of your new home,” explains Brad Reichert, debt expert and founder and managing director of Reichert Asset Management LLC. 

“Mortgage loans with a low down payment have a high loan-to-value (LTV) ratio, meaning the amount of your mortgage is high compared to the assessed value of the property, which presents an extra risk to the lender,” shares Reichert. “As a result, PMI is almost always required until you’ve built up at least 20% equity in your home,” he adds. 

Why Are Mortgage Loans Important?

The median home price in the U.S. was $419,200 in Q4, 2024. This is usually far greater than what most households can save. Mortgages allow people to achieve homeownership by putting forward a down payment, such as 5% to 20% of the purchase price, and getting a loan for the remaining balance.

Mortgage loans are also important because they allow homeowners to build equity in the asset over time. For many homeowners, this equity is an important part of their retirement planning.

Types of Mortgages To Consider for Your Future Home

There are several types of mortgage loans to select from, depending on the type of property you’re buying, your credit score, down payment, and mortgage size. We’ve listed the most common types of mortgage loans below.

Fixed-Rate Mortgage Loans

A fixed-rate home loan is the most common type of mortgage. With this type of loan, your interest rate will remain the same throughout the term of the loan. This means that your monthly payments will also remain the same. If you prefer predictability and are risk-averse, this may be the right type of mortgage for you.

Adjustable-Rate Mortgage (ARM) Loans

With adjustable-rate mortgages, your interest rate remains fixed for an initial term (typically 3-7 years). After that, it may increase or decrease annually based on a predetermined interest rate index or reference rate. Common benchmarks include the U.S. Prime Rate, the London Interbank Offered Rate (LIBOR), or the current yield on the 10-year U.S. Treasury Note.

These mortgage loans are usually more affordable in the short term because the initial rates are often substantially below the prevailing market rate. ARMs also come with caps that limit how much the interest rate can rise, both overall and at each adjustment.

Government-Backed Mortgage Loans

Government-backed mortgage loans are issued through government agencies. They are typically designed for low-income borrowers, those buying their first home, or those associated with the military. Two of the most popular loan programs are:

FHA Loans

For first-time homebuyers, FHA loans can be a great option, requiring only a 3.5% down payment. To qualify, you'll need a credit score of at least 580, or 500 if you can put down 10%.

While FHA loans typically require a DTI ratio of 43% or lower, higher ratios may be approved with strong compensating factors. Additionally, you must occupy the home as your primary residence for at least one year after purchase.

VA Loans

If you’re a military service member, veteran, or surviving spouse, you may qualify for a VA loan. These loans typically require a minimum credit score of 620, and while the standard DTI limit is 41%, some lenders may approve higher ratios for borrowers with solid financial standing.

There are no down payment requirements, making VA loans an affordable option. However, you'll need to pay a funding fee, which varies based on your down payment amount and whether it's your first VA loan or a subsequent one. Some borrowers, such as those with service-connected disabilities, may be exempt from this fee.

What To Consider Before Applying for a Mortgage Loan

You’ll need to meet the lender’s eligibility requirements to qualify for a mortgage loan, which we’ve listed below.

Credit Score and History

Mortgage lenders review your credit history to see how you’ve managed credit accounts in the past. Your credit score also helps them determine your interest rate—the higher your credit score, the lower your mortgage rate can be.

The minimum credit score requirements for different types of loans are:

• 620 for conventional fixed-rate or adjustable-rate mortgages
• 500 for FHA loans (requires at least a 10% down payment)
• 580 for FHA loans (with a minimum 3.5% down payment)
• 620 for VA loans (requirements may vary by lender)

Debt-to-Income Ratio

Lenders will also review your debt-to-income (DTI) ratio, which measures your total monthly debt payments compared to your gross monthly income. This ratio helps them determine your ability to repay the loan.

Ideally, your DTI ratio shouldn’t exceed 43%. However, DTI requirements may vary based on loan type and lender. Here’s what you can expect with most types of mortgage loans:

• 45% to 50% for conventional loans for well-qualified borrowers
• No set limits for VA loans, but recommendations are 41% for back-end DTI
• Up to 57%, with some exceptions for FHA loans

Income Stability

While there’s no set minimum income requirement, lenders assess your income stability and DTI ratio to ensure you can manage mortgage payments. You’ll need to demonstrate that you’ll be able to consistently cover your monthly mortgage payments along with your current bills each month, in good times and bad.

Lenders prefer borrowers with a stable source of income. Those with sufficient cash reserves and liquid investments are also preferred.

Other than your salary, lenders will also consider other sources of income, such as income from side gigs, alimony and child support, and military benefits.

How To Apply for a Mortgage Loan

Once you’ve identified the type of mortgage you’d like to apply for, here are the steps to follow to apply for a mortgage loan.

1. Gathering the Necessary Documents

Start by getting a copy of your credit report from all three major credit bureaus (Experian, Equifax, and TransUnion). Check your credit report for any errors and dispute them. Ensure your credit score is adequate to help you qualify for the type of mortgage you want to apply for.

Gather the necessary documents for the loan application, such as bank statements, investment account statements, pay stubs, income tax returns, and proof of income.

2. Improve Your Credit Score

If you have bad credit, it’s best to take steps to improve your credit before you apply for a mortgage. 

Pay all your bills on time and pay down some of your credit cards to improve your credit utilization ratio. Avoid applying for any new loans or credit cards for at least six months before applying for a pre-approval.

3. Save for a Down Payment

The amount of money you’ll need to save for a down payment will depend on the type of mortgage. Here are the minimum down payment requirements for the most common mortgages:

• 3% for conventional loans
• 3.5% for FHA loans (credit score of 580 or more), or 10% (credit score of 500 to 579)
• 0% for VA loans

Other than the down payment, you’ll also need to save money to cover the closing costs. We also recommend having enough saved to cover any unexpected maintenance or repair costs for your new home.

4. Find a Lender

To find the best mortgage lenders, ask family or friends for recommendations. If you’re working with a real estate agent, you can also ask them for a recommendation. Mortgage rates fluctuate every day, so it's best to get quotes from at least three different lenders on the same day.

Check the terms offered by different lenders and make sure you compare any fees they charge, such as origination fees and prepayment penalties, which can add to the cost of the loan. A loan’s annual percentage rate (APR) includes the interest rate as well as additional fees, so it’s a better measure of the loan’s true cost of borrowing.

5. Complete the Application

You’ll need to get a mortgage pre-approval from a lender before you start shopping for a home to see the loan amount you qualify for. Complete the mortgage application and submit your paperwork, so the underwriter can verify your information.

You may have to submit additional documents if required. Always be prompt when responding to the loan officer to avoid any delays.

Once you receive the final approval, you’ll need a closing disclosure before the closing. At the closing, provide a check for the down payment and closing costs, and sign the necessary paperwork to get the keys to your new home.

6. Stay Informed

Keep an eye out for new government programs and mortgage grants that can help make homebuying more affordable. For example, the proposed Downpayment Toward Equity Act of 2023 could offer first-time homebuyers up to $25,000 to assist with purchasing a home. If passed into law, it can be used for down payments, lowering interest rates, or covering closing costs.

Taking advantage of these new initiatives can make a big difference in your homebuying experience!

Refinance To Get a Better Mortgage Loan

If you already have a mortgage right now, you can refinance it to replace the existing loan with a new one. Refinancing allows you to lower your payment and get access to better rates or terms. If you have home equity, you can also get a cash-out refinance for home renovations, repairs, or debt consolidation.

Regardless of the reason for refinancing, it’s important to check the rates you qualify for with multiple lenders to get the best deal.  

Get the Best Mortgage Loan Rates and Terms

Mortgage loans are an essential part of homeownership for borrowers who don’t have enough money to purchase a home outright. With so many different types of mortgages to choose from, it’s important to seek advice from a mortgage broker you trust.

Check to see if you qualify for government-backed mortgages, since they usually offer lower interest rates and come with lower credit and down payment requirements.

Use a mortgage calculator to check your monthly payments to ensure they’re affordable and fit comfortably into your monthly budget.