Getting a Home Loan: What You Need to Know

9 Min. Read

When you’re ready to buy a home, you probably have a lot of questions. What is a mortgage? How does a home loan work? And, maybe most importantly, how do I qualify for a home loan?

There are no easy answers when it comes to how to get the best home loan. When you’re shopping for a mortgage, it’s important to consider your personal financial situation and goals. Understanding how a home loan works will help you make an informed decision that aligns with your financial goals.

We can help by explaining what a mortgage is, how it works, and how to determine which type of home loan is right for you. Armed with this knowledge, you can confidently embark on your homeownership journey.

Home Loans and How They Work

What is a Mortgage?

If you’re considering buying a home, you’ve probably searched online for “what is a mortgage explained.”

A mortgage is a type of loan used to purchase a home, where the property itself serves as collateral. When you get a mortgage, you borrow money from a lender and agree to pay back the funds over a set period of time with interest and fees. Mortgage terms commonly range from 15 to 30 years.

How does a Home Loan Work?

Home loans are similar to other types of loans you might be familiar with, like personal or auto loans. When you take out a mortgage, you will pay the lender back in equal monthly installments (referred to as loan payments or monthly payments). Your monthly loan payment will include both principal and interest, and the amount will depend on a few factors:

• The total amount of the loan,
• The interest rate (or APR), and
• The loan term.

Note that escrow for payments like property taxes or homeowner’s insurance can also influence the amount of your monthly mortgage payments. We’ll discuss escrow in more detail below.

Key Home Loan Terms to Know

Here are the most common terms you’ll likely hear when you’re applying for a home loan:

Annual Percentage Rate (APR). APR is the amount of interest and fees you’ll pay to borrow money to purchase a home, stated as a yearly percentage. Learn more about APR.

Interest Rate. Interest rate refers to the annual cost of a loan. It is the fee you pay for borrowing money, expressed as a percentage of the loan amount.Learn about the difference between APR and interest rate.

Down Payment. Your down payment is the amount you’ll pay upfront toward the cost of your home.

Escrow. Escrow accounts are commonly used to manage and distribute funds for property taxes and homeowner’s insurance. When you have an escrow account, a portion of your monthly mortgage payment goes into this account.

Loan Term. The loan term is also sometimes called loan duration. This is the length of time you have to pay off your loan. A common mortgage term is 30 years.

Monthly Payment. Your monthly payment is the amount you will pay on your loan each month. It includes principal, interest, and other fees that might apply.

Principal. Principal is the loan amount you’re borrowing minus any fees, penalties, interest, or other costs associated with your mortgage loan.

Total Cost. Total cost is the full loan amount—including principal and interest—that you’ll pay over the life of your mortgage.

Private mortgage insurance (PMI). Private mortgage insurance (PMI) protects a lender in case you’re unable to pay your mortgage. This type of insurance is sometimes required if you make a lower down payment on the home you’re buying. Marine Credit Union does not charge PMI. Learn more about PMI and how it differs from other types of insurance.

Types of Mortgages

When you’re ready to buy a home, you’ll be faced with many choices. With so many mortgage options out there, it can be tough to figure out which type of home loan is right for you.

As you explore your options, it’s important to consider your current financial situation and your long-term goals. From adjustable rate to fixed rate and FHA to VA, here are some of the most common types of mortgages you’ll encounter.

Adjustable-Rate Mortgage (ARM). An adjustable-rate mortgage loan has an interest rate that changes at set intervals, such as Marine Credit Union’s 5-year ARM, which adjusts every five years. What you pay each month may change according to the terms of your loan. Learn how to determine if an adjustable-rate mortgage is right for you.

Fixed-Rate Mortgage. A fixed-rate mortgage loan has a set interest rate that doesn’t change. With a fixed-interest rate mortgage, you only have to worry about your payment increasing if you also have an escrow account and your tax or homeowner’s insurance payments change.

Conventional Loans. Non-government conventional mortgage loans are aimed at people with moderate to good credit. They tend to charge higher interest rates and fees for people with lower scores. Fannie Mae and Freddie Mac are the top administrators for conventional loans.

FHA Loans. Backed by the Federal Housing Administration, FHA mortgage loans have one of the lowest credit requirements. An FHA loan is attractive for first-time home buyers because FHA-backed loans don’t require higher interest rates if you have bad credit.

VA Loans. Backed by the Department of Veterans Affairs, VA loans allow for purchasing a home with zero down payment. VA loans often have the lowest interest rates. You may qualify for a VA loan if you are a veteran, service member, eligible spouse, or military affiliate.

USDA Loans. Backed by the U.S. Department of Agriculture, USDA loans allow you to buy a home with $0 down and low rates. USDA loans are specifically for low-to-moderate-income households and enforce strict income limits for applicants.

How to get a Mortgage and Buy a Home

Buying a home is a big milestone, but understanding how to get a mortgage and buy a house can be overwhelming. There are a lot of things to consider when it comes to identifying the right home loan for your financial situation.

Everyone’s journey to ownership will look a little different, but we’ve boiled the process down to five important steps:

• Consider getting pre-approved for a mortgage loan. Before starting your search for a home, you may want to get pre-approved for a mortgage. Financial institutions that offer pre-approval programs will assess your creditworthiness and determine the loan amount you qualify for. Marine Credit Union does not have a mortgage pre-approval program, but our lenders can help you set your budget and determine how much you can afford.
• Find a home you want to buy and begin the mortgage process. Once you find a home you want to purchase, it’s time to begin the mortgage application process. This involves providing your chosen lender with detailed information that will determine the loan terms.

• Submit requested financial documents. During the mortgage process, you’ll be required to submit various financial documents, such as employment verification, pay stubs, and bank statements. These documents will help the lender verify that you meet their lending criteria.

• Complete closing and sign your mortgage documents. Closing is the final step in the home-buying process. At closing, you’ll review and sign all the necessary paperwork, including the mortgage agreement, title documents, and other legal disclosures. You’ll also pay closing costs and fees.

• Accept the keys and enjoy homeownership! Once your mortgage documents are signed and the transaction is finalized, you’ll get the keys to your new home. Settle in and enjoy the accomplishment of homeownership!

Learn more about how to buy a home in our blog, 10 Steps for First-time Homebuyers: The Home Buying Process.

What Type of Mortgage Home Loan is Right for Me?

Deciding which type of mortgage is right for you depends on your financial situation and goals. Before you get a home loan, it’s important to create a budget and determine how much you’ll be able to afford in a down payment and monthly mortgage payments.

Wondering where to start? Marine Credit Union offers a variety of budgeting and financial planning tools to help you on your lending journey. Our free online calculators can help you Calculate a Down Payment or Calculate a Mortgage Payment.

What to Look for in a Home Loan

Choosing the right mortgage loan is an important step in the home-buying journey. You’ll be faced with a lot of choices and understanding what to look for in a home loan can make a big difference in your financial future.

When you’re looking for the best home loan, there are a few important factors to consider, including:

• The interest rate and annual percentage rate (APR)
• The loan term (often 15 or 30 years)
• How all the costs associated with a mortgage factor into your monthly payments

Learn more about what to look for in a home loan.

Do you have a few mortgage options in hand? Use our free online calculator to Compare Two Mortgage Loans.

Frequently Asked Questions: Home Loans

Can I Afford to Buy a Home?

A simple loan calculator can help you determine the cost of a loan and decide what you can afford. A home loan calculator will compute your monthly payments and total interest based on the purchase price, down payment, and interest rate.

Marine Credit Union offers a variety of free budgeting and financial planning tools to help you on your lending journey, including our Mortgage Payment Calculator.

Curious about how to buy a home with bad credit? Learn about Bad Credit Home Loans.

What Does Mortgage Term Mean?

The mortgage term refers to the duration of your home loan. It represents the length of time over which you agree to make regular payments to repay the loan. Mortgage terms commonly range from 15 to 30 years, but shorter or longer terms may also be available.

What are the Different Types of Mortgages?

When you’re ready to buy a home, you’ll be faced with many choices. Some of the most common types of mortgages you’ll encounter include:

• Adjustable-rate Loan
• Fixed-rate Loan
• FHA Loan
• VA Loan
• USDA Loan

What is the Process of Getting a Home Loan?

Everyone’s journey to homeownership is different. The typical steps to getting a home loan include:

1. Consider getting pre-approved for a mortgage loan.
2. Find a home you want to buy and begin the mortgage process.
3. Submit requested financial documents.
4. Complete closing and sign your mortgage documents.
5. Accept the keys and enjoy homeownership!

It’s important to note that once you begin the home-buying process, you should avoid changing jobs or requesting additional credit (such as an auto loan, credit card, or other forms of financing). These things can impact your credit score, which is one of the most significant factors influencing a lender’s decision to approve you for a mortgage.

Learn more about how to buy a home in our blog, 10 Steps for First-time Homebuyers: The Home Buying Process.

How do Banks Qualify you for a Home Loan?

Lenders take many factors into account when assessing your creditworthiness and determining whether you qualify for a loan. Some of those factors include:

• Your credit score and credit history
• Your debt-to-income ratio
• The loan-to-value ratio (the loan amount versus the value of the property)

What are the Different Down Payment Options for Buying a Home?

No matter your financial situation, homeownership is within reach. There are several different down payment options for buying a home, including:

• Standard down payment. A standard down payment on a home is usually 20% of the home’s purchase price.
• Low down payment. A low down payment typically ranges from 3% to 10% of the home’s purchase price.
• Zero down payment. Certain loan programs and lenders allow for no money down. The types of mortgages that allow for zero down payment include VA loans for veterans and USDA loans for rural homebuyers.

Is Getting a Home Loan a Good Idea?

Your readiness for homeownership depends on a number of factors, including your career, family obligations, and financial situation. It’s up to you to weigh the benefits of renting versus owning a property. Read more about the benefits of buying a home and how to make the right choice for your financial situation.

 

Commitment

Different home-buying circumstances call for different types of mortgages. We’re committed to finding the right loan that works for your unique needs.

Compassion

We don’t think a low credit score should stand in the way of homeownership. If you’re ready to purchase a home, we’re ready to discover a way to make it possible.

Flexibility

Some lenders have rigid lending guidelines and qualifications that are tough to meet. If you’ve been told “no,” we can help you find the path to “yes.”