Mortgage & Financing Basics
Understanding how financing fits into the home-buying process
For most buyers, purchasing a home involves two transactions happening at the same time: buying the property and obtaining the financing to pay for it.
Your lender determines what financing options are available to you, while AED Realty helps you understand how those financing decisions affect your home search, offer strategy, and purchase transaction.
You don't need to become a mortgage expert before buying a home, but understanding a few basics can make the process much easier.
Start With a Mortgage Preapproval
Before seriously shopping for a home, one of your first steps should be speaking with a mortgage lender and obtaining a preapproval.
During the preapproval process, the lender typically reviews information about your:
Income and employment
Credit history
Assets and available funds
Existing debts and monthly obligations
Expected down payment
Overall financial profile
The lender can then give you an idea of the loan amount and financing programs for which you may qualify.
A preapproval is not a final loan approval. Your financing will still be subject to underwriting, verification of your information, the property you choose, and other lender requirements.
Preapproval vs. Prequalification
You may hear both terms used when discussing mortgages.
A prequalification is generally an initial estimate based on financial information you provide to a lender.
A preapproval typically involves a more detailed review of your financial information and may include verification of income, assets, and credit.
Processes vary by lender, so it's worth asking exactly what has been reviewed before relying on either one.
When you're preparing to make an offer, a strong preapproval can also help demonstrate to the seller that you've taken steps toward securing financing.
How Much Home Can I Afford?
The amount a lender is willing to approve and the amount you're comfortable spending aren't necessarily the same thing.
Your monthly housing expense can include more than principal and interest. Depending on the property and your loan, you may also have:
Property taxes
Homeowners insurance
Mortgage insurance
Homeowners association assessments
Flood insurance, when applicable
Other property-related expenses
Before establishing your search price range, consider the total monthly payment—not just the purchase price.
Your lender can help you estimate payments at different price points so you can determine a range that works for your budget.
How Much Do I Need for a Down Payment?
You don't necessarily need a 20% down payment to purchase a home.
The amount required depends on your loan program, financial qualifications, and the property you're purchasing. Some financing programs allow significantly smaller down payments, while others may have different requirements.
A larger down payment may reduce your loan amount and monthly payment and, depending on the loan, could affect mortgage insurance requirements.
Your lender can compare available programs and explain the advantages, costs, and requirements of each.
Common Types of Mortgage Financing
There are several types of mortgage programs, and the right one depends on your circumstances.
Conventional Loans
Mortgages that aren't insured or guaranteed by a federal government agency. Down-payment and qualification requirements vary.
FHA Loans
Loans insured by the Federal Housing Administration that may offer different down-payment and credit requirements than conventional financing.
VA Loans
Loans available to eligible veterans, active-duty service members, and certain other qualified borrowers through the U.S. Department of Veterans Affairs.
USDA Loans
Financing that may be available to eligible borrowers purchasing qualifying properties in eligible areas.
There are also other loan programs, including options for first-time buyers, renovation financing, jumbo loans, and programs offered by individual lenders.
Your mortgage professional can help determine which programs you may qualify for.
Your Down Payment Isn't the Only Cash You'll Need
One of the most common misconceptions among buyers is that the down payment represents everything they'll need to purchase a home.
There can be other expenses before and at closing, including:
Earnest money
Home inspection and optional specialized inspections
Appraisal
Lender and loan-related costs
Attorney fees
Title and closing-related charges
Homeowners insurance
Prepaid interest
Tax and insurance escrows, when applicable
Other costs specific to the transaction
Some of these expenses may ultimately be reflected in the amount you need to bring to closing, while others are paid earlier in the transaction.
What Determines My Mortgage Interest Rate?
Mortgage rates can change frequently, and the rate available to one borrower may not be the same rate available to another.
Factors can include:
Current financial-market conditions
Credit profile
Loan type and term
Down payment and loan-to-value ratio
Property type and occupancy
Loan amount
Whether you're paying points
When the interest rate is locked
Because rates and loan pricing change, a rate you see advertised online shouldn't necessarily be treated as the rate you'll receive.
Your lender can provide pricing based on your specific circumstances.
What Is a Rate Lock?
A mortgage rate lock generally allows you to secure a particular interest rate and loan pricing for a specified period while your transaction moves toward closing.
The length, cost, terms, and availability of a rate lock vary by lender and loan program.
Your lender can explain when you are eligible to lock your rate and what happens if the closing date changes or the lock expires.
What Happens After I'm Under Contract?
Once your offer is accepted, your lender's work becomes much more property-specific.
You'll generally need to provide your lender with the executed purchase contract and promptly respond to requests for updated documentation.
The lender may then coordinate:
Loan Application → Documentation & Underwriting → Appraisal → Final Loan Approval → Clear to Close
During this time, avoid making significant financial changes without first discussing them with your lender.
Be Careful With Your Finances Before Closing
Getting preapproved doesn't mean your financial qualifications are frozen in place.
Your lender may verify your credit, employment, assets, debts, and other information again before closing.
Until your purchase is complete, talk with your lender before:
Opening or closing credit accounts
Financing a vehicle or other major purchase
Making unusually large purchases
Moving significant amounts of money between accounts
Making large cash deposits that may be difficult to document
Changing jobs or employment status
Co-signing a loan for someone else
Taking on additional debt
Something that seems unrelated to your home purchase can potentially affect your mortgage approval.
Should I Talk to More Than One Lender?
You can.
Interest rates are important, but they aren't the only factor worth comparing. Buyers may also want to consider loan programs, lender fees, estimated closing costs, communication, responsiveness, and the lender's ability to meet the deadlines in the purchase contract.
A very attractive advertised rate isn't particularly helpful if the loan doesn't fit your circumstances or the lender can't perform within the transaction timeline.
AED Realty can provide lender recommendations if you'd like them, but the choice of lender is yours.
Financing Is Part of Your Offer Strategy
Your financing doesn't just matter at closing. It can affect how an offer is structured and how a seller evaluates it.
Before submitting an offer, we'll consider your financing alongside the other terms of the transaction so you understand how the pieces work together.
Your lender handles the mortgage. Your attorney handles the legal aspects of the transaction. AED Realty helps coordinate the real estate process and keeps everyone moving toward the same goal.
Ready to See What Your Budget Can Buy?
Once you understand your financing and have a comfortable price range, you can start exploring available properties.
This information is provided for general educational purposes and is not intended as legal, tax, financial, or lending advice. Loan programs, interest rates, qualification requirements, and individual circumstances vary. Consult a licensed mortgage professional and other appropriate professionals regarding your specific circumstances.