Mortgage 101: Mortgage Basics for First-Time Homebuyers

Mortgage 101: Mortgage Basics for First-Time Homebuyers

If you’re thinking about buying a home but don’t have bookoos of money on hand, chances are you need a mortgage. Unfortunately, when it comes to mortgage loans, it's easy to become confused and even frustrated. But there’s no need to worry! If you want to learn about mortgage basics, you’re in the right place. In this article, we’ll go over what a mortgage is, how to get one, the four main mortgage types, and much more!

What is a Mortgage?

In a nutshell, a mortgage is a loan between a homebuyer and a mortgage lender. It’s taken out for the purposes of buying a home or building. Mortgages allow homebuyers to purchase homes without having to pay the full price all at once. If you consider the fact that even cheap homes can easily cost $100,000 or more, it’s easy to see the value of a mortgage. 

Without mortgages, every potential home buyer would have to either save an extreme amount of money, borrow from friends, or seek out other financing options.

How a Mortgage Loan Works

When you get a mortgage, you enter into a legal agreement with your chosen mortgage lender. They will give you the lump sum of money to buy the residence, and you’ll be responsible for paying the lender back in monthly installments. 

Your monthly mortgage payment will go toward the following loan components:

    1. Principle: The dollar amount you borrowed. 
    2. Interest: How much the lender charged for lending you money. Common interest rates are between 3 and 5% of the home purchase price. 
    3. Home insurance: Insurance purchased to cover select problems with the home throughout the life of the loan. 
    4. Property taxes held in escrow: Every month, a portion of your payment will be held in a holding account (called an escrow account) to cover the taxes assessed on your property

  • Private mortgage insurance: PMI is required for conventional loans if your down payment is less than 20% of the value of the mortgage loan. It helps to cover the lender in the event that you stop paying your mortgage. 

To protect the interests of the lender, your new home will act as loan collateral. That means that if you stop making payments and default on the loan, the lender can seize the home and resell it to minimize their losses. 

Frequently Used Mortgage Loan Terms

To better understand how a mortgage works, you’ll need to know the definitions of the following terms: 

  • Down payment: A down payment is a portion of the purchase price of the home, made at closing. Some loan types require a minimum down payment while others do not. For VA loans, you are not required to submit a down payment (more on loan types later).
  • Loan amount: The full amount that you’ll be borrowing from the lender. This could be more than the purchase price of the home. 
  • Loan term: How long it will take for you to pay off the loan. The most common loan terms are 30 years and 15 years.

How Do You Get A Mortgage?

Now that you know what a mortgage is and how it works, let’s get into how to get a mortgage. 

Find a Lender

There are plenty of lenders in the market, and each has their own mortgage application process, customer support capabilities, and qualification requirements. We highly recommend researching any lender you’re considering and asking them how they conduct the mortgage application and closing processes. It’s also helpful to look at reviews to see what customers think of a given lender. 

Once you select a lender, you’ll want to speak with a loan officer. They will answer preliminary questions, facilitate the loan preapproval steps, and assist with any obstacles that come up on the road to closing. 

How to Qualify For a Mortgage

The million dollar question is “Will you qualify for a mortgage?” The answer is, you certainly could! Before you jump into the loan application process, we encourage you to take a look at some key factors that determine whether you may qualify for a mortgage. 

Credit Score

In most cases, to buy a house, you’ll need a credit score of at least 620. This minimum applies for conventional (or uninsured) home loans. But don’t count yourself out if your credit score is lower than 620. For FHA loans (serviced through the Federal Housing Association), you may be able to qualify with a score as low as 500. When you speak with a lender, tell them upfront if you’re concerned about your credit score. They can tell you about any alternative loan options that may be available to you. 

Work History

If you want to get a mortgage to buy a home, you’ll usually need at least two years of work history in a given industry. Industry-switching is considered a red flag for lenders. By contrast, a steady work history communicates to lenders that you have a track record of generating income and are likely to continue doing so. If you know you’re going to be applying for a mortgage loan soon, try not to switch job industries, and avoid significant employment gaps. 

Down Payment

For typical home loans, you’ll be required to make a down payment at closing. The point of a down payment is to show that you’re serious about this loan. If you put thousands of dollars into the loan upfront, you’re less likely to default on the loan down the line. If you’re short on cash, look into government-backed loans, like FHA or VA loans. VA loans require no down payment, while FHA loans require a lower down payment than non-government home loans. You may also qualify for a down payment assistance program.


You’ll also need to prepare to pay closing costs when you go to sign for the mortgage at closing. Closing costs usually total 3 to 6% of the home’s purchase price. They cover payment to your realtor, appraisal fees, title insurance and other administrative costs.

Home Insurance

Home insurance is a requirement for many mortgage loans. Typically, you’ll be required to purchase a home insurance policy that will cover the entire cost of your home in the case of a disaster. For many, home insurance is a small cost, especially when compared to some of the other costs associated with home ownership. 

(Learn about the mistakes that could cost you your mortgage. Read our blog about 9 Reasons Your Mortgage Can Fall Through.

Mortgage Types You Should Know About

Loan Type

Minimum Down Payment

Credit Score Minimum

Main Loan Features


3% – 20% of purchase price


Fixed interest rates, private mortgage insurance required for down payment lower than 20%, variable loan terms


3.5% – 10% of purchase price


Alternative loan options available for credit scores as low as 500 with 10% down payment, closing cost assistance available




No money down, Low income doesn’t disqualify you, manual underwriting can qualify people with low credit scores




No down payment, VA loan benefit can be used repeatedly, lower interest rates than other loan types

Mortgage Interest Rate Types

When it comes to interest rates, it’s important to know the difference between a fixed rate and an adjustable rate. Fixed-rate mortgages carry interest rates that stay the same for the duration of your loan. No matter what happens in the economy, your interest rate is fixed in place.

Adjustable-rate mortgages (ARMs) have interest rates that change periodically, throughout the life of the loan. Most ARMs start with an initial fixed period, usually a number of years. After this, the interest rate may change at regular intervals (e.g. six months). ARMs usually start with a lower interest rate than fixed-rate mortgages. That can make them a good option if you only plan on living in the house for a few years.

(Discover more about the pros and cons of fixed-rate and adjustable-rate mortgages.)

When Do You Make Your First Mortgage Payment?

You’ll make your first mortgage payment on the first of the month after you’ve owned the home for 30 days. So, if your closing date was July 15, your first mortgage payment would be September 1. Afterward, you’ll pay your mortgage on the first of each month. 

Can You Sell Your House Before The Mortgage Is Paid?

You can certainly sell your house before the mortgage is fully paid. When you do sell the house, you can use a portion of the proceeds to pay off your current home loan. We recommend that you ask your lender whether there are prepayment penalties for paying your loan off early. 

Dig Deeper into Mortgages

Now that you know the basics of mortgages, it’s time to dig deeper. Our Homebuyer Education course is designed to teach you the ins and outs of the entire homebuying process. Learn more about the steps to buy a home, how to build a financial plan and more. The course is online, and you can take it at your own pace. Get started today!

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