The Ultimate Guide to Mortgages: Loan Types, Rates, Approvals & Closing Explained

📘 Quick Summary: What Is a Mortgage?

A mortgage is a loan used to buy or refinance real estate. The home acts as collateral, and the borrower repays the lender over time through monthly payments that include principal, interest, and—when escrowed—property taxes and homeowners insurance.

For a full breakdown of these monthly costs, see What Is PITI?

• ✔ A mortgage finances the purchase or refinance of a home
• ✔ The property acts as collateral for the lender
• ✔ Monthly payments often include taxes & insurance (escrow)
• ✔ Approval is based on credit, income, debt ratios & employment
• ✔ Different loan types offer different costs and qualification rules

New to mortgage concepts? Start with: What Is a Mortgage in Real Estate?

🔍 How Mortgages Work in a Real Estate Transaction

Every financed home sale — whether FSBO or agent-listed — involves a mortgage when the buyer needs a loan. The mortgage process determines the buyer’s purchasing power, the conditions of approval, and the final steps required to close. Understanding how mortgages work helps sellers avoid delays and prepares buyers for what to expect from application to closing.

Seller Note: The loan type a buyer chooses often depends on the financing terms you allow when listing your home. To understand how financing terms (FHA, VA, Conventional, Cash, etc.) affect your buyer pool and mortgage eligibility, see Financing Terms When Selling a House →

📌 1. Mortgage Application

The buyer submits a full application detailing income, credit, employment, debts, and assets. Lenders use this information to determine the type of loan the buyer qualifies for.

Guide: How to Apply for a Mortgage →

Guide: What Is a Mortgage?

📌 2. Loan Estimate (Within 3 Days)

The lender must provide a Loan Estimate (LE) within three business days. It outlines the loan terms, estimated payment, interest rate, closing costs, and cash-to-close.

Guide: What Is a Loan Estimate?

📌 3. Mortgage Underwriting

Underwriting is the lender’s detailed verification of the buyer’s creditworthiness, income, assets, debt, employment, and the property’s appraised value. This stage often results in approval with conditions.

Guide: What Is a Mortgage Underwriter?

📌 4. Appraisal & Property Review

The lender orders an appraisal to confirm the home’s value supports the loan amount. The lender may also review the title report, insurance, and property condition depending on loan type.

📌 5. Mortgage Approval (Clear-to-Close)

Once all conditions are satisfied — income documents, appraisal, title, insurance, etc. — the lender issues the final approval known as Clear-to-Close (CTC).

📌 6. Closing Disclosure (3-Day Rule)

The buyer receives the Closing Disclosure (CD) at least three days before signing. It itemizes the final loan terms and closing costs.

Guide: What Is a Closing Disclosure?

📌 7. Closing & Funding

At closing, the buyer signs the mortgage note and deed of trust (or mortgage), funds are distributed, and the lender finalizes the loan. The transaction becomes official once the mortgage and deed are recorded.

Guide: How Recording Works →

📌 8. How Mortgages Interact with Title

The lender requires a clean title before funding. The title company confirms ownership, clears liens, and ensures the mortgage will be recorded properly. Mortgage loans create a lien on the property until paid off.

Related Guide: Real Estate Title Guide

📘 Key Parties in a Mortgage

Before diving into how mortgages work, it's important to understand the two main parties involved in every mortgage loan:

Mortgagor: The borrower—the homeowner who receives the loan and gives the lender a lien on the property. Full Mortgagor Definition →

Mortgagee: The lender—the bank or mortgage company that provides the financing and holds the security interest until the loan is repaid. Full Mortgagee Definition →

This terminology is used throughout mortgage documents, including the Loan Estimate, the Closing Disclosure, and recorded mortgage or deed of trust.

📋 Types of Mortgage Loans (Explained)

These are the most common mortgage loan types used in residential real estate. Each link opens a full “What Is” guide with qualifications, requirements, benefits, and FSBO use cases.

✔ Fixed-Rate Mortgage

Provides a stable interest rate and payment for the entire loan term — typically 15 or 30 years.

✔ Adjustable-Rate Mortgage (ARM)

Offers a low introductory rate that adjusts periodically based on market conditions.

✔ FHA Loan

Government-backed loan with flexible credit requirements and low down payments — ideal for first-time buyers.

✔ VA Loan

Zero-down mortgage for eligible veterans, active-duty service members, and surviving spouses.

✔ USDA Loan

Zero-down rural housing loan for eligible buyers in designated USDA areas.

✔ Conventional Loan

Standard mortgage not backed by the government. Requires stronger credit and larger down payments.

✔ Jumbo Loan

Used for higher-priced homes that exceed conforming loan limits. Requires strong credit and large reserves.

✔ Interest-Only Mortgage

Allows borrowers to pay interest only for the first several years, then converts to full principal + interest payments.

✔ Balloon Mortgage

Features low initial payments followed by a large lump-sum payment at the end of the term.

✔ Piggyback Loan (80/10/10)

Two-loan structure allowing buyers to avoid PMI and reduce down payment requirements.

✔ HELOC & Home Equity Loan

Loans based on a homeowner’s equity — often used for repairs, renovations, or debt consolidation.

📘 Core Mortgage Concepts (Explained)

These foundational mortgage concepts help buyers understand payments, risk, loan structure, and how lenders determine approval. Each links to a full “What Is” guide for deeper learning.

✔ Principal & Interest

Your monthly mortgage payment is made up of principal (loan balance) and interest (borrowing cost). Early payments go mostly toward interest.

✔ Amortization

The schedule of how your loan is repaid over time. Payments start interest-heavy and become principal-heavy in later years.

✔ Private Mortgage Insurance (PMI)

Required for most buyers putting less than 20% down. PMI protects the lender—not the borrower—and can be removed once equity is high enough.

✔ Escrow Account

An account used by the lender to collect and pay property taxes and insurance. Common in government-backed and low-down-payment loans.

✔ Mortgage Points

Upfront fees paid at closing to lower the loan’s interest rate. Often called “discount points.”

✔ APR (Annual Percentage Rate)

Represents the total borrowing cost, including interest and lender fees. Used to compare loan offers fairly.

✔ Debt-to-Income Ratio (DTI)

A major qualification factor. Lenders compare monthly debt to monthly income to ensure the buyer can afford the mortgage.

✔ Loan-to-Value Ratio (LTV)

The loan amount compared to the property value. Lower LTV often means lower risk and better loan terms.

✔ Due-On-Sale Clause

A mortgage provision allowing the lender to demand full repayment if the property is sold or transferred without approval.

✔ Mortgage Pre-Approval

A lender’s verified estimate of what a buyer can afford. Stronger than prequalification and often required for offers.

✔ Rate Lock

Guarantees an interest rate for a set period during the loan process, usually 30–60 days.

✔ MIP (FHA Mortgage Insurance)

Required on all FHA loans. Includes both upfront and annual premiums to insure the lender.

✔ Front-End vs Back-End Ratios

Lenders compare housing costs alone (front-end) and total debt (back-end) to ensure mortgage affordability.

⚠️ Common Mortgage Problems & How They Affect Closing

Certain issues can delay mortgage approval, increase costs, or prevent closing entirely. Most are identified during underwriting or the appraisal process and must be resolved before the lender issues Clear-to-Close (CTC).

• Low appraisal value (home appraises under contract price)
• High debt-to-income ratio (DTI) that exceeds lender limits
• Insufficient income documentation or unverifiable employment
• Credit score drops after application
• Large, unexplained bank deposits
• Insufficient assets for down payment or reserves
• Property condition issues noted on appraisal (roof, safety, foundation)
• Title problems (liens, ownership disputes, unreleased mortgages)
• Short sale situations (when the home is worth less than the mortgage and lender approval is required) – Short Sale Guide
• Deed in lieu scenarios (seller cannot satisfy the mortgage and seeks lender approval to transfer ownership) – Deed in Lieu Guide
• Delayed or missing insurance (homeowners or flood)
• Interest-rate lock expiration before closing

If underwriting uncovers problems or errors, you may need additional documentation or updated disclosures:
How Underwriting Works →

🏡 How Mortgages Work in FSBO Transactions (Brokerless)

The mortgage process is the same whether a buyer purchases a home FSBO or through a real estate agent. What changes for FSBO sellers is communication, transparency, and control. Understanding how lenders operate helps sellers anticipate buyer needs and avoid delays during underwriting and closing.

✔ What Stays the Same

• Buyer’s loan type (FHA, VA, USDA, conventional, etc.)
• Mortgage underwriting requirements
• Appraisal rules and minimum property standards
• Loan conditions and documentation requirements
• Title search and lien clearance
• Loan Estimate (LE) and Closing Disclosure (CD)
• 3-day Closing Disclosure review period
• Recording of the mortgage and deed

✔ What’s Better for FSBO Sellers

• No listing agent delays in communication with lenders
• Direct coordination with the buyer, lender, and title company
• Faster exchange of documents and requested repairs
• More transparency into appraisal expectations and loan milestones
• Ability to negotiate concessions directly (rate buydowns, closing credits)
• Clearer understanding of what is needed for buyer approval

Need guidance navigating the process? See: DIY Home Selling Playbook →

Planning your costs as a seller? Seller Closing Costs (Full Guide)

Handling purchase contract contingencies? Full Contingencies Guide →

📚 Explore All Mortgage Guides

• Mortgage (Definition)
• Loan Estimate
• Closing Disclosure
• Escrow Account
• Mortgage Underwriter
• Fixed-Rate Mortgage
• Adjustable-Rate Mortgage (ARM)
• FHA Loan
• VA Loan
• USDA Loan
• Conventional Loan
• Jumbo Loan
• Interest-Only Mortgage
• Balloon Mortgage
• Piggyback Loan (80/10/10)
• Wraparound Mortgage
• Private Mortgage Insurance (PMI)
• MIP (FHA Mortgage Insurance)
• APR (Annual Percentage Rate)
• Debt-to-Income Ratio (DTI)
• Loan-to-Value Ratio (LTV)
• PITI (Principal, Interest, Taxes & Insurance)
• Mortgage Points
• Amortization
• Mortgage Pre-Approval
• Rate Lock
• Real Estate Mortgages Explained

📘 Related Master Guides

• Real Estate Title Guide
• Real Estate Deeds Guide
• Contingencies Guide
• Seller Closing Costs (Full Guide)
• DIY Home Selling Playbook

❓ Mortgage FAQs

✔ What is the most common mortgage type?

The most common home loan is the conventional 30-year fixed-rate mortgage because it offers predictable payments and competitive rates.
Conventional Loan →

✔ How much down payment do I need?

It depends on the loan type:

• FHA: as low as 3.5%
• Conventional: 3%–20%
• VA: 0% down
• USDA: 0% down

✔ What credit score is required for a mortgage?

Minimums vary:

• FHA: 580+ (3.5% down) or 500–579 (10% down)
• Conventional: typically 620+
• VA: lender-dependent (often 580–620+)
• USDA: usually around 640+

✔ What is PMI and when does it go away?

Private Mortgage Insurance (PMI) protects the lender and is required when the buyer puts less than 20% down. PMI can typically be removed once the borrower reaches 20% equity.
PMI Explained →

✔ Can a low appraisal affect my mortgage?

Yes. If the home appraises below the purchase price, the lender may reduce the loan amount. Buyers may need to renegotiate or pay the difference in cash.

✔ What documents do lenders require?

Typically:

• W-2s or 1099s
• Pay stubs
• Bank statements
• Tax returns (sometimes)
• Employment verification
• Photo ID

✔ What is Clear-to-Close (CTC)?

CTC means the lender has approved the loan, all conditions are satisfied, and the borrower can proceed to sign final documents at closing.

✔ Does the buyer need a mortgage for FSBO transactions?

Yes — FSBO deals follow the exact same lending rules as agent-listed sales. Sellers should be prepared for lender-required repairs, appraisal timelines, and underwriting conditions.

✔ Can I get a mortgage with self-employment income?

Yes, but lenders require more documentation: tax returns, business statements, profit-and-loss statements, and proof the income is stable.

✔ What is the difference between prequalification and preapproval?

Prequalification is an estimate based on self-reported info.
Preapproval requires verified documents and is much stronger when making offers.
Mortgage Pre-Approval →

🚀 Ready to Buy or Sell with Confidence?

Brokerless gives you MLS access, mortgage-friendly guidance, and full transparency — all without paying a 6% commission. Whether you're buying with a mortgage or selling FSBO, you stay in control of the entire process.

View Flat Fee MLS Plans →