Click to navigate:
- What Is a Purchase Loan?
- How the Home Purchase Loan Process Works
- Types of Purchase Loan Programs
- Fixed-Rate vs Adjustable-Rate Purchase Mortgages
- Buy Your First Home with Confidence
What Is a Purchase Loan?
A purchase loan is a mortgage used to finance a home purchase. You’ll typically repay the loan over a period of 15 or 30 years, though other terms may be available depending on the loan type.
- Purchase loans can be used for:
- Primary residences
- Second homes or vacation properties
- Investment properties
- Various residential property types such as single-family homes, condominiums or townhomes
The loan amount will depend on the value of the home. Other loan features, including the loan type and interest rate, will also be impacted by your credit score, income and various financial factors.
How the Home Purchase Loan Process Works
In order to secure a purchase loan, you’ll have to provide information and documentation to your lender at each stage.
1. Securing Mortgage Pre-Approval*
Pre-approval is a conditional loan approval that may be issued by a lender when they receive and review your financial information. Pre-approval is often issued prior to you settling on a specific home, so actual approval is conditioned on certain criteria being met such as the execution of a purchase agreement.
Pre-approval a smart first step to take in the mortgage process because it gives you a firm upper limit on what you can afford as you begin your home search.
A lender will review your finances, including but not limited to:
- Credit history and credit score
- Income
- Employment history
- Debt obligations
- Estimated assets for down payment and reserves
If you receive pre-approval, you’ll receive a pre-approval letter that you can show to sellers. A pre-approval letter may strengthen your purchase offer because it demonstrates to sellers that you’re a serious buyer with the finances to back you up.
2. Home Shopping and Making an Offer
Once you’ve secured a pre-approval, you can begin searching for homes within your budget. When you find a home you love, you submit a purchase offer, often through a real estate agent.
If the seller accepts your offer, you sign a purchase agreement and submit a formal mortgage application.
3. Loan Application and Processing
At this point, you’ll provide your lender with supporting documents that may include but are not limited to:
- Tax returns
- Pay stubs
- Bank statements
- Asset verification
- Purchase agreement
Your lender then begins processing the loan and coordinating required services such as the property appraisal and title review.
Keep in mind: It’s in your best interest to have your documents correctly completed, organized and ready to send so that your lender can process the loan as quickly as possible.
4. Underwriting Review
Underwriting is the process a lender uses to evaluate your financial situation and determine their level of risk in offering you a loan. This process typically takes several weeks, and timing will vary depending on the type of loan you’re seeking and other factors like the completeness of your documents.
Factors assessed include but are not limited to:
- Your debt-to-income ratio (DTI)
- Your credit score and credit history
- The property value relative to the loan amount, as assessed by the appraisal
- The stability of your income and employment
- Any asset reserves you have
If you have a loan with Newrez, we make every effort to keep you in the loop on your application’s process and reach out to you if we’re missing any necessary information.
If underwriting conditions are satisfied, the loan can move to final approval.
5. Closing Your Mortgage
At closing, all parties sign the legal documentation necessary to complete the home purchase. Your lender funds the mortgage, and ownership of the home transfers to you!
Don’t forget to plan for closing costs, which can be 2-5% of the home’s total purchase price. Typical closing costs may include but are not limited to:
- Loan origination fees
- Appraisal fees
- Title insurance
- Escrow deposits
- Recording fees
After closing, you’ll begin making monthly mortgage payments according to the loan terms.
Types of Purchase Loan Programs
Different mortgage programs serve different borrower needs. Listed below are some common mortgage types, but if you don’t fit traditional lending guidelines, Newrez carries a full stack of specialty loan products for borrowers like you. Reach out to us to learn more.
Conventional Purchase Loans
Conventional loans are widely used by homeowners. Many of them are backed by Freddie Mac® or Fannie Mae®.
Key features:
- Typically require credit scores of 580 or higher
- Down payment requirements vary, but certain programs allow down payments as low as 3%. Down payments of 20% or higher remove the requirement for private mortgage insurance (PMI).
Conventional loans may be ideal for buyers with strong credit and a stable income.
FHA Purchase Loans
Loans backed by the Federal Housing Administration are designed to help buyers who may have limited savings for a down payment or imperfect credit.
Key features:
- Down payments as low as 3.5%
- May require a credit score of 580 or higher
- Higher allowable debt-to-income ratios
- Requires either an upfront mortgage insurance premium or an annual mortgage insurance premium
FHA loans can be helpful for first-time homebuyers.
VA Purchase Loans
VA loans are available to eligible Military servicemembers, Veterans and some surviving spouses.
Key features:
- No down payment requirement for eligible borrowers with full entitlement
- No private mortgage insurance
- Competitive interest rates
- May require a credit score of 580 or higher
For Military homebuyers, VA loans are a powerful tool for achieving homeownership.
USDA Purchase Loans
USDA mortgages support homeownership in designated rural and suburban areas.
Key features:
- Put as little as 0% down
- Reduced mortgage insurance costs
- Competitive interest rates
- Borrowers must have incomes below 115% of the area median income to qualify
These loans can make homeownership possible for low- to moderate-income households in designated areas.
Fixed-Rate vs Adjustable-Rate Purchase Mortgages
Homebuyers can choose between different interest rate structures depending on their needs and desires. Most of the above loan types offer both fixed-rate and adjustable-rate loan structures.
Fixed-Rate Mortgages
A fixed-rate mortgage maintains the same interest rate throughout the life of the loan.
Benefits may include:
- Predictable monthly payments
- Protection from rising interest rates
- Long-term budgeting stability
Common terms include 30-year and 15-year mortgages.
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages start with a lower fixed interest rate for an introductory period before adjusting periodically based on market shifts.
ARMs are described in terms of the length of years during which the rate is fixed, and then the frequency with which the rate can change after that. For example, a “5/6 ARM” describes a loan where the rate is fixed for five years, and then adjusts every six months following that. Common ARM structures include 5/6 ARMs, 7/6 ARMs, 10/6 ARMs and 5/1 ARMs (where the rate adjusts once a year).
These loans may be attractive for buyers planning to move or refinance before the adjustment period begins, or anticipating a meaningful increase in their income down the road.
Buy Your First Home with Confidence
If your goal is homeownership, you’re on the right track — you’ve already taken a smart step by educating yourself about purchase loans. If you’re not sure what you might be able to afford, explore our Mortgage Calculators to get an idea of your homebuying power.
Financing a home purchase is a major financial decision, but you don’t have to navigate it without guidance. Newrez loan experts are just a call away, and they’re ready to answer all of your questions and show you what’s possible. Don’t hesitate to connect and move one step closer to your homeownership goals.
