purchase mortgage
Buying a home starts with understanding the purchase mortgage that will fund it. A purchase mortgage is the loan you use to buy a property, and knowing how interest rates, down payment, and lender choices affect your monthly payment and total cost lets you make a smarter financial move.
You’ll learn how different mortgage types, posted and special rates, and broker versus bank options change what you qualify for and what you pay. This article walks through what lenders look for, how to prepare your application, and the key decisions that shape your mortgage so you can act with confidence.
Understanding Purchase Mortgage
A purchase mortgage lets you buy a home by financing most of the purchase price and repaying the loan over time. Key points include the loan type, down payment, interest rate structure, and how monthly payments break down.
What Is a Purchase Mortgage
A purchase mortgage is a loan you use to buy residential property. The property itself secures the loan, meaning the lender can foreclose if you fail to repay.
You typically make a down payment (commonly 3–20% of the purchase price) and borrow the remainder. Your mortgage documents specify the principal, interest rate, loan term, and any required mortgage insurance.
Lenders evaluate your credit score, income, employment history, debt-to-income ratio, and the property’s appraisal to approve the loan. Closing costs—such as origination fees, title insurance, and escrow—add to your upfront cash needs.
Types of Purchase Mortgages
Fixed-rate mortgages keep the interest rate and monthly principal-and-interest payment the same for the loan term. Common terms are 15 and 30 years. You get predictable payments and protection if rates rise.
Adjustable-rate mortgages (ARMs) start with a lower fixed rate for a set period, then adjust periodically. Look at the index, margin, initial fixed period (e.g., 5/1 ARM), adjustment caps, and lifetime caps to understand payment risk.
Government-backed options include FHA, VA, and USDA loans. FHA allows lower credit scores and smaller down payments but requires mortgage insurance. VA and USDA loans offer favorable terms for eligible buyers, often with no down payment.
Jumbo loans cover amounts above conforming loan limits. They require stronger credit, higher down payments, and stricter documentation.
How Purchase Mortgages Work
You apply with a lender and provide income, asset, and credit documentation. The lender underwrites the file, orders an appraisal, and issues a loan estimate showing rates, fees, and monthly payments.
At closing you sign loan documents, pay your down payment and closing costs, and the lender funds the mortgage to the seller. Your repayment schedule combines principal reduction and interest; early payments on principal reduce total interest paid.
Monthly payment components commonly include:
- Principal and interest: core loan repayment.
- Property taxes: often collected into an escrow account.
- Homeowners insurance: typically escrowed.
- Mortgage insurance: required for low down payments on some loans.
If you refinance later, you replace the existing mortgage with a new loan—potentially to change rate, term, or tap equity. Keep documentation current and monitor interest rates if you plan to refinance.
Qualifying and Applying for a Purchase Mortgage
You need to meet lender standards, gather specific documents, and complete a structured application to move from offer to financing. Income, down payment, credit, and the stress test determine how much you can borrow and which products you qualify for.
Eligibility Criteria
Lenders evaluate your income, debts, credit, and down payment. They calculate your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to ensure mortgage payments plus other housing costs stay within acceptable limits—typically GDS ≤ 32–39% and TDS ≤ 40–44%, depending on lender and product.
The mortgage stress test requires you to qualify at a higher rate than your contract rate; for insured mortgages, you must also meet federal minimum qualifying rates. Self-employed borrowers should expect additional scrutiny: two years of notice-of-assessment (NOA) or a lender-specific income calculation.
Down payment size affects insurance and interest: insured mortgages require at least 5% for homes under $500,000, while purchases above certain thresholds need higher payments. Residency status and age also matter—permanent residents and citizens face simpler rules than temporary residents, who may need larger down payments or co-signers.
Application Process
Start with a mortgage pre-approval to lock in a rate and confirm your budget. A pre-approval uses verified income, credit checks, and a provisional mortgage amount, valid usually for 60–120 days.
After you have an accepted offer, submit a full application to the chosen lender or broker. The lender orders appraisal, title search, and verifies employment and funds. Expect underwriting to review ratios, credit files, and property details; this step determines final approval and specific loan terms.
If the lender requires mortgage default insurance, approval timing can lengthen due to additional documentation and insurer criteria. Keep communication open: respond promptly to requests for extra paperwork to avoid delays before closing.
Required Documentation
Prepare government ID, recent pay stubs (usually last 2–3), employer contact information, and two years of tax returns or NOAs for self-employed applicants. Lenders also request bank statements covering 60–90 days to verify down payment source and reserves.
Provide your mortgage pre-approval letter or proof of funds for the down payment and closing costs. Include the signed purchase agreement and property details (address, MLS number, purchase price). If you have existing debts, supply loan statements and credit card statements so the lender can calculate TDS/GDS accurately.
Additional documents may include evidence of gifted down payment (gift letter), landlord references for rental history, and incorporation documents if income flows through a corporation.
