Mortgage Loan Education

What is a Mortgage?

A mortgage is a type of loan that banks or other lenders offer to help you pay for your home at the time of purchase on the condition that you repay them over a given amount of time. A mortgage involves monthly payments and interest in addition to the cost of the home itself.

Buying a home can be very expensive. It can feel impossible when you look at the price tag. Fortunately, a mortgage loan allows you to pay the purchase price by making monthly payments later.

You must first apply and be accepted for a mortgage loan. When applying for a mortgage, you will be asked to provide financial information such as your credit score, yearly earnings, and details about any current debt you have. If you qualify for the mortgage loan, you will then be able to buy your home with that loan and repay your lender later, in monthly installments.

While your mortgage lender pays for most of the home, you as the future homeowner are responsible for providing a down payment on the home. The down payment is a percentage of the cost of your home, and the higher your down payment, the smaller your mortgage loan needs to be and the less money you must repay each month to pay off this debt. Down payments are a percentage of the total cost, and this percentage can vary from home to home.

Key Terms & Glossary

A conventional loan is a purchase loan that is not guaranteed by a government agency but can be made or guaranteed by a private lender or one of the Government Sponsored Entities (GSE) like Fannie Mae and Freddie Mac. The borrower’s down payment requirements vary by product and interest rate is often based on a combination of loan-to-value ratio and credit score.

FHA is a loan product designed for borrowers with a lower down payment and/or a lower credit score than conventional loan products. Mortgage insurance is charged in both an upfront fee and an annual premium charged monthly. The cost of mortgage insurance is based on the loan amount and loan-to-value ratio. FHA mortgage insurance cannot be cancelled even if the unpaid balance of the loan falls below 80% of the property value. Borrowers typically need to provide 3.5% down payment plus closing costs. Down payment assistance can be used with this product if that product is approved, but typically can't be used toward the 3.5% buyer requirement unless it is from a government source.

VA is a loan product that is available to Service Members, Veterans, National Guard, and Reserve Members, a program that provides a guarantee to private lenders to make loans with little or no upfront cash required from the borrower. The borrower pays a one-time upfront funding fee, which is based on the loan to value and whether it is the borrower's first time using a VA backed loan. That fee currently ranges from 1.4% to 3.6% of loan amount.

USDA Direct/Purchase is a program to assist low-and very low-income applicants purchase or repair a home in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Currently, CPLC is a Certified Packager and markets the program, prescreens potential applicants, counsel clients, and assist the applicant in assembling a complete application.

USDA Guarantee – Purchase is a program that provides a 90% guarantee to approved lenders to make purchase loans to eligible buyers in rural areas. Family income is limited to 115% of median household income and borrowers can finance up to 100% of the purchase price to reduce the upfront cash requirement. Borrowers pay an upfront guaranteed fee and an annual fee, charged monthly.