how a home mortgage works
home mortgages allow a much broader group of citizens the chance to own real estate as the entire purchase price of the house doesn t have to be provided up front but because the lender actually holds the title for as long as the mortgage is in effect it has the right to foreclose on the home seize it from the homeowner and sell it on the open market if the borrower can t make the payments a home mortgage will have either a fixed or floating interest rate which is paid monthly along with a contribution to the principal loan amount in a fixed rate mortgage the interest rate and the periodic payment are generally the same each period in an adjustable rate home mortgage the interest rate and periodic payment vary interest rates on adjustable rate home mortgages are generally lower than fixed rate home mortgages because the borrower bears the risk of an increase in interest rates either way the mortgage works the same way as the homeowner pays down the principal over time the interest is calculated on a smaller base so that future mortgage payments apply more toward principal reduction than just paying the interest charges in a mortgage transaction the lender is known as the mortgagee and the borrower is known as the mortgagor types of mortgagesthere are different types of mortgage loans that a borrower may use to purchase a home generally speaking they can be grouped into three broad categories conventional loans federal home administration fha loans and specialty loans conventional mortgage loans are not part of a specific government loan program these loans can be conforming meaning that they adhere to mortgage rules set by fannie mae and freddie mac or nonconforming private mortgage insurance may be required for conventional loans when the borrower puts less than 20 down upfront fees on fannie mae and freddie mac home loans changed in may 2023 fees were increased for homebuyers with higher credit scores such as 740 or higher while they were decreased for homebuyers with lower credit scores such as those below 640 another change your down payment will influence what your fee is the higher your down payment the lower your fees though it will still depend on your credit score fannie mae provides the loan level price adjustments on its website fha loans are mortgage loans issued by private lenders and backed by the federal government key characteristics of fha loans include lower credit score requirements and lower down payment requirements it s possible to get approved for an fha loan with a credit score as low as 580 and a down payment of 3 5 or a credit score as low as 500 and a 10 down payment specialty mortgage loans are loans that don t fit into the conventional or fha loan categories this includes u s department of veterans affairs va loans which are designed for veterans and their families and u s department of agriculture usda loans which allow borrowers in eligible rural areas to purchase homes with no down payment the va loan program and usda loan program don t specify minimum credit score requirements but generally lenders look for scores of 620 or higher 