What is a mortgage? Loan basics for beginners

Key takeaways:

• A mortgage is a long-term loan used to purchase real estate, typically repaid over 15 or 30 years through a legal agreement between a borrower and lender.
• Several parties may be involved in a mortgage, including the borrower, lender, and potentially a co-signer who shares repayment responsibility.
• Mortgage types vary widely, including fixed-rate, adjustable-rate, conventional, FHA, VA, and USDA loans, with the best fit depending on factors like home price, down payment, and eligibility.

A mortgage is a loan used to buy real estate. A mortgage is usually amortized to be paid off over a term of 15 or 30 years. If you’re thinking about buying a home, you’ll likely need a mortgage to do so. To get started, it helps to define a mortgage and understand the basics of how one works.

What is a mortgage?

A mortgage is a legal agreement between a borrower and a lender to purchase a property. The borrower, also known as the mortgagee, signs a promissory note indicating a commitment to repay the loan, while the lender, also known as the mortgagor, provides the funds. In some cases, a co-signer may also be involved to share responsibility if the borrower cannot make payments.

The borrower repays the loan over time, covering the amount borrowed plus interest and fees. The lender holds the property as collateral until the loan is fully paid off. If the borrower stops making payments, the lender can foreclose on the home and sell it to recover their money.

Who are the parties in a mortgage?

Several parties may be involved in a mortgage transaction, including the borrower, lender, and co-signer.

Borrower or mortgagee

The borrower signs the promissory note on a mortgage to borrow money for buying a home. The borrower can be an individual, a couple, or a group of people.

Mortgage lender

A mortgage lender provides the borrower with the money they need to buy a property. The lender typically is a financial institution, like a bank or credit union.

Lenders will review the borrower’s finances, including their credit history, credit score, debt-to-income ratio, and any other assets they may have, to confirm the borrower can afford to repay the loan.

Co-signer

A co-signer agrees to take responsibility for repaying the mortgage if the primary borrower cannot. A co-signer would need to make any missed payments, even if their name is not on the house title. A co-signer is typically required if the borrower has a limited or low credit history.

The most common types of mortgages

There are several mortgage options available, and the right one depends on your financial situation, credit score, and homebuying goals. Understanding the differences between each type can help you make a more confident and informed decision. The most common mortgages are conventional loans, which are not government-backed, and government-backed loans such as FHA, VA, and USDA loans. Borrowers also choose between fixed-rate mortgages, which offer consistent payments, and adjustable-rate mortgages, which have variable rates that can change over time. Whether you're a first-time buyer or looking to refinance, it's worth exploring all of your options and speaking with a mortgage lender to find the best fit for you.

What is a fixed-rate mortgage?

The interest rate on a fixed-rate mortgage never changes. That ensures that your monthly payment for your loan’s principal and interest remains the same for the entire loan term.

What is an adjustable-rate mortgage?

The interest rate on an adjustable-rate mortgage changes, usually once a year. ARMs typically have an introductory fixed rate that is lower than the rate for a fixed-rate loan and expires after a specific number of years. After that, the interest rate will adjust according to market rates, and your payment for principal and interest may increase or decrease along with the rate. You’ll see ARMs described as 5/1 or 7/1. The first number is how many years you pay the introductory rate, and the second number is how often the rate adjusts after that. A 7/1 ARM would have a fixed rate for 7 years and then adjust every year after that.

Conventional conforming loans

Conventional conforming loans are private loans that meet specific guidelines set by Fannie Mae and Freddie Mac, including a maximum loan amount. For 2026, the baseline conforming loan limit for a single-family home is $832,750 in most parts of the country. Homes in designated high-cost counties may have higher loan limits. Because these loans meet set guidelines, lenders are able to sell them to Fannie Mae or Freddie Mac, which frees them up to make additional loans to other borrowers. If your down payment is less than 20%, your lender will require you to pay for private mortgage insurance (PMI), which can be removed once you've built up 20% equity in the home.

Conventional nonconforming loans

Nonconforming loans are mortgages offered by private lenders that don't meet the conforming loan standard in some way. The most common nonconforming loan is a jumbo loan, so called because it exceeds the conforming loan limit. The 2026 limit for a one-unit home is $832,750, and $1,249,125 in specific high-cost areas. To borrow more than that, jumbo loan lenders usually require more documentation, a more robust credit history, and a down payment of at least 10%, though some lenders require as much as 25% or 30%, depending on your loan amount and credit history. 

What is an FHA mortgage?

Federal Housing Administration loans are for low- to mid-income buyers and allow borrowers to have a lower credit score. FHA loans require a minimum down payment of 3.5% with a credit score of at least 580.⁴ Some lenders provide FHA loans to borrowers with a credit score between 500 and 579 with a 10% down payment. Rocket Mortgage requires a credit score of at least 580 and a minimum down payment of 3.5%

What is a VA mortgage loan?

Veterans Affairs loans are available only to military personnel, veterans, and their surviving spouses. VA loans don’t require a down payment, but borrowers may need to pay a one-time funding fee and meet additional requirements.¹

What is a USDA loan?

U.S. Department of Agriculture loans are for low- to mid-income borrowers buying a home in a specific rural area. Household income must generally be at or below 115% of the area median income. Those who qualify may not need a down payment. Note that Rocket Mortgage does not currently offer USDA loans.

What’s the best type of mortgage for you?

The best type of mortgage for you depends on your financial situation, home buying goals, and the loan programs you may qualify for. Here are some key factors to consider:

• The home’s purchase price. If you want to qualify for government-backed or conventional loans, the home’s price needs to be at or below the maximum threshold. Otherwise, you may need a jumbo loan.
• Available down payment. Some conventional loans require a down payment of only 3%.² Government-backed loans like VA loans may not need one. When speaking to a lender, be upfront about the amount you can put down and see what your options are.
• Type of mortgage rate. Many lenders prefer the predictability of a fixed-rate loan, especially if you plan to own the home for a long time, while an ARM may make sense if you plan to sell or refinance before your rate adjusts.
• Lender fees and interest rates. Your mortgage rate directly affects how much your monthly payment will be. What is a good interest rate for a mortgage? That depends. What’s probably more important to know is that even a small reduction in your interest rate can save you a lot of money. You also will need to pay fees such as closing costs, which typically total 3% – 6% of your loan amount. Be sure to look at a loan’s annual percentage rate, too. The APR includes all the costs of a loan and allows you to directly compare mortgage offers.
• The loan repayment term. A 30-year mortgage is the most common, followed by a 15-year loan. Ask your lender if you’re interested in a custom term. For example, Rocket Mortgage offers a YOURgage option, with repayment terms of 8 – 29 years.³
• Eligibility for government-backed loans. FHA, VA, and USDA loans can make buying a home more affordable for eligible borrowers. It’s worth checking if you’re eligible.

How to get a mortgage

Most lenders will follow the steps outlined here to assess your eligibility and approve you for a mortgage. While the process may seem overwhelming at first, being prepared and understanding what to expect can make it much smoother.

Here's a quick overview of the steps:

• Prepare your finances: Review your credit score, DTI ratio, and savings for a down payment and closing costs.
• Get mortgage preapproval: Submit your financial information to a lender to find out how much you may be eligible to borrow.
• Shop for a home and make an offer: Work with a real estate agent to find a home and submit a competitive offer.
• Get final approval: Once your offer is accepted, officially apply for a mortgage and go through underwriting and appraisal.
• Close on your loan: Review your Closing Disclosure, pay closing costs and your down payment, and sign the final documents.

Let's take a closer look at each step.

Prepare your finances

You’ll want to review your finances to understand how much you can afford to spend on a home. Rocket Mortgage has a home affordability calculator that can help you get started. Important figures to check include your credit score and your DTI ratio. Lenders use those numbers to gauge how well you manage your finances and whether you can afford the monthly mortgage payment. You can use a mortgage calculator to estimate costs. You also will need to have money saved up for the down payment. You also have to pay closing costs, which typically total 3% – 6% of your loan amount.

Get mortgage preapproval

When you’re ready to start shopping for a home, apply formortgage preapproval. The lender will review the financial information you submit and estimate how much it expects you could borrow to buy a home. This is useful because it shows real estate agents and sellers that you’re ready to buy. Mortgage preapproval letters are usually valid for 60 – 90 days.

Shop for a home and make an offer

Work with areal estate agent to find and tour available homes in your desired area. Your agent can help you submit a competitive offer to sellers. The purchase offer will include the price you’re offering, important terms such as contingencies that need to be met for the sale to go through, any offer of earnest money, and a timeline for closing the sale.

Get final approval

Once the seller accepts your offer, you officially apply for a mortgage. Your lender will provide you with a Loan Estimate for your loan costs. While your lender is underwriting the loan, the lender will order an appraisal of the property to ensure it’s worth enough to justify the loan. This is when the contingencies come into play and must be met for the sale to proceed. A home inspection contingency is common and requires the home’s condition to be examined and reviewed by a third-party professional.

Close on your loan

Your lender will provide you with a Closing Disclosure at least 3 days before your scheduled closing. This document finalizes all the terms and costs associated with your mortgage and the transaction. You’ll see projected monthly payments, fees, interest rates, and other loan terms. At closing, you’ll pay closing costs and the down payment and then sign the documents that fund your loan and transfer legal ownership of the property to you.

Mortgage glossary

Here are some standard terms and concepts related to getting a mortgage.

Amortization

Amortization is a method for calculating the payment on a loan so that the interest and principal are paid off over a specific time. It also determines how much of each payment goes to principal and how much to interest. When you start paying your mortgage, most of your payment will go to interest. Over time, that amount will decrease, and more of each payment will go toward reducing the principal until the entire loan is paid off. To better understand how this works, check out this amortization calculator from Rocket Mortgage.

Down payment

Most mortgages require the borrower to pay part of the cost of the home up front. This is the down payment, which is usually expressed as a percentage of the purchase price. The mortgage provides the rest of the money needed to purchase a home. How much of a down payment you need depends on the home’s purchase price, the type of loan you’re using to buy the home with, and your lender. This down payment calculator from Rocket Mortgage can help you estimate costs.

Escrow

Escrow is a contractual arrangement where a third party collects, holds, and pays out funds related to a transaction. When you buy a home, an escrow account will be set up for all expenses. You’ll pay in your down payment and closing costs, and an escrow agent will ensure the correct parties are paid for their services. The account also will collect your mortgage funds and pay out any profit to the seller.

Many lenders set up an escrow account to ensure borrowers pay their homeowners insurance premiums and property taxes. The lender will estimate the annual cost and add a prorated amount to your monthly mortgage payment. That amount is kept in the escrow account and then pays your insurance premiums and property taxes on your behalf.

Interest rate

The interest rate determines how much you pay the lender to borrow the principal. The interest rate is a percentage. The interest rate is different from the APR, which includes the interest rate and all the fees and costs associated with the loan.

Mortgage note

A mortgage note also is known as a promissory note. This legal document outlines each party’s responsibilities and the terms for a mortgage.

Loan servicer

A loan servicer is responsible for managing a mortgage. The servicer collects your monthly payment and manages your escrow account. Lenders often sell the mortgages they issue to a loan servicer, so this can be a different company than your original lender.

The bottom line: Mortgages make homeownership possible

Mortgages allow borrowers to finance the purchase of a home over a long period of time. In doing so, mortgages make it possible for more people to own a home and build equity. If you’re just learning about the home buying process, it’s important to understand how mortgages work and what your options are.

If you’re ready to explore your borrowing options, start the approval process today with Rocket Mortgage.

¹Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

²The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

³ Not available on FHA, VA or adjustable-rate mortgages. Available for fixed-rate conventional products only.

⁴To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.