Mortgage purchase explained
A mortgage is a type of loan that you can get from a bank or other lender to help you buy a house or other property. Mortgages come with various interest rates, down payments, and terms—all of which can vary depending on the lender.
A down payment on your mortgage is the money you pay upfront when buying a home. The lender will fund the rest.
You’re likely to get approved for a mortgage purchase with a 20% down payment, but you can still put down less depending on a few factors, like the type of mortgage, the lender’s requirements, and your credit history.
Securing a down payment for home loans can feel like a roadblock for mortgage buyers, and while there are benefits to larger down payments, buyers can certainly put down much less.
Online mortgage lenders
Types of mortgages
When it comes to mortgages, there are two primary types: There are government-backed loans and conventional loans. A government-backed loan means it’s insured by the government, which removes the risk for lenders in the case of a borrower defaulting on the loan. This means that the most suitable mortgage rates will often be found with these types of offerings.
A conventional loan is riskier for lenders because it doesn’t have that safety net the government provides. So you can expect the mortgage interest rates, fees, and even down payment to be higher.
Government-insured mortgages
These secured mortgages include a variety of loans, VA loans, USDA loans, and FHA loans, which must meet the requirements set by the Federal Housing Administration (FHA).
VA loans
VA loans are specifically designed for military members and their families. It comes with some great perks, like a $0 down payment for a mortgage and no PMI, as long as applicants meet the eligibility requirements.
FHA/HUD loans
These types of loans require borrowers to make a minimum down payment of 3.5% and have a minimum FICO score of 580 to qualify. Borrowers may still qualify with a lower credit score, but they’ll need to make a higher down payment.
USDA loans
These loans are for homes in rural areas and are guaranteed by the U.S Department of Agriculture (USDA). Applicants with a low income can be eligible for this loan type to purchase, build, or renovate a home located in specific regions in the United States.
With USDA home loans, all mortgage expenses and closings costs are combined into the loan to minimize the standard out-of-pocket loan costs. Other qualifying requirements may vary, depending on the lender.
How you can get a mortgage and decent mortgage rates
Get a pre-qualification or mortgage pre-approval letter
This is a document you can get from a lender that states you’re pre-approved for a loan, and may also include the loan amount. However, this doesn’t mean the loan is guaranteed since an applicant’s mortgage pre-approval status is based on assumptions that still need to be verified in the application process.
While not always necessary, it’s good to have a mortgage pre-approval to present to potential sellers as a sign of good faith that you’re serious about purchasing their home. It lets them know that you have a lender lined up and that you can afford the home.
This document does not tie you to a lender. You can still shop around to find the most suitable mortgage rates today.
Companies like LendingTree allow you to quickly and easily compare the rates of several lenders at once online. LoanDepot and AmeriSave, while not lending marketplaces, do allow applicants to get fast quotes online without a hard credit check.
Gather the necessary home loans documents
Once your offer on a home is accepted, you can then move forward in gathering all the necessary documents for your lender, which can take time.
Here is what you’ll need:
- Recent W-2 forms and pay stubs
- 1099s for those who own a business, including profit and loss statements
- Information on all debts, like monthly payments and amounts, still owed
- Lists of assets, like savings, investments, and retirement accounts
- Tax returns from the past two years
- Depending on the lender, there may be some additional information and documentation you’ll need to submit.
Good Faith Estimate & Truth in Lending disclosure
Within three days of being approved for a mortgage loan, you’ll receive a Good Faith Estimate (GFE) from your lender that includes all the costs involved in securing the loan.
The Truth in Lending disclosure will contain information about what you’re required to pay and the terms of the loan, like the APR, fees, mortgage rates, and underwriting costs.
How to choose mortgage lenders
While you can secure a mortgage from a traditional financial institution, like a bank or credit union, online lenders will often have competitive rates and looser requirements, which can make getting a loan easier and cheaper.
When searching for online lenders, it’s important that they offer the type of loan you’re interested in, like a VA loan, USDA loan, FHA, or other loans. Not every lender has the same product offerings.
Conduct research on the lenders you find to ensure that they have experience in the industry, good customer service, and no hidden fees.
A good lender will always be transparent about the costs and fees involved in securing a mortgage and be willing to walk you through the process.
It’s also worth keeping in mind that every lender has varying requirements, fees, and current mortgage rates, so take time to shop around to find the most satisfactory deal. This includes different rates for different term lengths. Therefore, you will need to specifically look at 15-year mortgage rates if this is the duration you need with your mortgage.
Traditional mortgage lenders vs online mortgage lenders
What’s great about doing business with an online lender is that everything can be done online. There’s no need to speak with someone in person or step foot in a branch. You can submit your documentation electronically and complete your application online.
Additionally, many online lenders offer guidance throughout the process so you’re not left on your own, just as a traditional bank lender would, except it’s done through online communication and via phone.
With traditional lenders, the process can also take longer due to the amount of paperwork involved. The process is less streamlined than when everything is online.
Best of all, with online lending, you can shop around and compare current mortgage rates right from the comfort of your home. Online lenders allow you to submit some basic information about yourself to see what mortgage rates today you qualify for, making it easy to compare lenders side-by-side and get the most suitable mortgage rates. And once you’re ready to move forward with an offer, you can finish the process online.
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