IN THIS GUIDE: Types of Loans | Rate Buy-Downs | What's in Your Mortgage | The Loan Process | Escrow and Closing Costs | Key Terms Glossary
Types of Loans
MOST COMMON
Conventional
A standard mortgage not backed by a government agency. Lenders set their own standards. Typically requires a credit score of 620+ and a down payment of 3 to 20%. If you put down less than 20%, you will pay Private Mortgage Insurance (PMI) until you reach 20% equity. These loans follow limits set by Fannie Mae and Freddie Mac; for 2026 that limit is $832,750 in Northern Colorado.
Credit score: 620+ | Down payment: 3 to 20% | PMI if less than 20% down | Fixed or adjustable rates
LOW DOWN PAYMENT
FHA
Backed by the federal government, making it easier to qualify. A credit score as low as 580 qualifies for 3.5% down; scores between 500 and 579 require 10% down. All FHA loans require Mortgage Insurance Premium (MIP) regardless of down payment amount. FHA loans are for primary residences only.
Credit score: 580+ | Down payment: 3.5% | MIP always required | Primary residence only
VETERANS ONLY
VA
One of the most powerful loans available. No down payment required, no PMI, and competitive interest rates. Available to active-duty service members, veterans, and eligible surviving spouses. Requires a VA funding fee (1.25%-3.30%) that can be rolled into the loan. A Certificate of Eligibility (COE) is required to apply.
0% down payment | No PMI | VA funding fee applies | COE required
RURAL BUYERS
USDA
Designed for low-to-moderate income buyers in eligible rural and some suburban areas. Requires no down payment and offers below-market interest rates. Both the property and the buyer must meet USDA eligibility requirements. A guarantee fee replaces PMI.
0% down payment | Income limits apply | Location restricted | Guarantee fee, not PMI
LUXURY / HIGH-VALUE HOMES
Jumbo
For purchase prices that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Because these loans cannot be sold to government-sponsored entities, lenders take on more risk and require stronger qualifications. Expect a credit score of 680+ with a preferred score of 700+, significant cash reserves that amount to 6 to 12 months of mortgage payments, and a down payment of 10 to 20%.
Credit score: 700+ | Down payment: 10 to 20% | Exceeds ~$800,000 in most areas | Cash reserves required
SHORT-TERM FINANCING
Bridge
A short-term loan (typically 6 to 12 months) used to bridge the gap when buying a new home before selling your current one. It uses your existing home's equity as collateral. Bridge loans carry higher interest rates (typically between prime and prime + 2%) and fees than traditional mortgages, but allow you to make a competitive offer without a home sale contingency. Once your current home sells, you pay off the bridge loan and convert to a traditional mortgage.
Term: 6 to 12 months | Higher interest rate | Uses existing home equity | No sale contingency needed
Rate buy-down options
FOR THE LIFE OF THE LOAN
Permanent Buy-Down (Discount Points)
You pay points at closing to permanently reduce your interest rate. One point equals 1% of the loan amount and typically lowers your rate by approximately 0.25%. On a $400,000 loan, one point costs $4,000 and might lower your rate from 7% to 6.75%. This makes financial sense if you plan to stay in the home long enough to recoup the upfront cost through lower monthly payments. This is called your break-even point.
1 point = 1% of loan amount | ~0.25% rate reduction per point | Permanent savings | Calculate break-even first
TEMPORARY RATE REDUCTION
2-1 Buy-Down
A temporary rate reduction often paid by the seller or builder as a concession. If your mortgage rate is 7%: Year 1 rate is 5%, Year 2 rate is 6%, and Year 3 onward returns to 7%. The difference in payments for years 1 and 2 is covered by funds placed in escrow at closing. This can ease buyers into homeownership with lower early payments and provides time to refinance if rates fall.
Year 1: rate minus 2% | Year 2: rate minus 1% | Year 3+: full note rate | Often funded by seller or builder
EXTENDED TEMPORARY REDUCTION
3-2-1 Buy-Down
Similar to the 2-1 but extends the graduated reduction over three years. At a 7% note rate: Year 1 is 4%, Year 2 is 5%, Year 3 is 6%, and Year 4 onward is 7%. The upfront escrow deposit required to fund the 3-2-1 is roughly double that of a 2-1, because the reduction is deeper and covers three years instead of two. Common in new construction where builders offer this as an incentive in a higher-rate environment.
Year 1: rate minus 3% | Year 2: rate minus 2% | Year 3: rate minus 1% | Year 4+: full note rate
Sellers and builders may offer to fund a buy-down as a concession instead of reducing the purchase price. Always compare the long-term value of each option with your lender.
What's in Your Mortgage Payment
Principal
The portion of your payment that reduces the actual loan balance. This grows larger over time as your loan amortizes. Early in the loan term, very little goes toward principal.
Interest
The cost of borrowing money, expressed as an annual percentage rate (APR). The interest portion is highest at the start of the loan and decreases over time as the balance is paid down.
Property Taxes
Property taxes are collected monthly and held in your escrow account, then paid directly to your county or municipality when due. Amounts vary significantly by location.
Homeowners Insurance
Your insurance premium is collected monthly and paid from escrow. This coverage is required by lenders to protect the property used as collateral for the loan.
PMI / MIP
Mortgage insurance is required when your down payment is less than 20% on a conventional loan (PMI) or on all FHA loans (MIP). It protects the lender, not you, and adds to your monthly cost.
HOA Dues
If applicable, homeowners' association fees may be collected by some lenders as part of your monthly payment, especially in planned communities or condominiums.
Lenders use PITI to calculate your total monthly housing expense when determining what loan amount you qualify for. Always ask for a full payment breakdown, not just the principal and interest.
Escrow & closing costs
Earnest Money
When you make an offer, you submit earnest money (typically 1 to 3% of the purchase price) as a good-faith deposit. This is held in escrow by a neutral third party, such as a title company, real estate broker, or attorney, not by the seller. If the transaction proceeds to closing, earnest money is applied toward your down payment or closing costs. If you back out within your contingency periods, it is typically refunded in full. If you back out without a valid contingency, you may forfeit the deposit.
Impound Account
After closing, your lender sets up an ongoing escrow account to manage taxes and insurance. Each month, a portion of your payment goes into this account. When your property tax bill or homeowners insurance premium is due, the lender pays it directly on your behalf. Most lenders require an escrow account on loans with less than 20% down. It ensures your property taxes and insurance remain current, protecting the lender's collateral.
Lender Fees
Origination fee Discount points (if applicable) Underwriting fee Prepaid interest
Third-Party Fees
1
Pre-Qualification
A quick, informal estimate of what you may be able to borrow based on self-reported income, assets, and debts. No credit pull required. Good for early planning, but not sufficient when making an offer.
2
Pre-Approval
A formal review by a lender. They pull your credit and verify income and assets. You receive a pre-approval letter with a maximum loan amount. This is what sellers want to see before accepting an offer.
3
Loan Application
Once your offer is accepted, you formally apply for the mortgage. You will submit a Uniform Residential Loan Application (Form 1003) with full financial documentation: W-2s, tax returns, bank statements, and pay stubs.
4
Loan Estimate (LE)
Within 3 business days of application, the lender provides a Loan Estimate, a standardized form detailing your estimated rate, monthly payment, and closing costs. Compare LEs from multiple lenders before committing.
5
Processing and Underwriting
Your loan file is reviewed by an underwriter who verifies all information and assesses risk. They may issue conditions, additional documents, or clarifications needed before approval. This is typically the longest stage (1 to 3 weeks).
6
Home Appraisal
A licensed appraiser visits the property to determine its market value. Lenders will only loan up to the appraised value. If the home appraises below the purchase price, you may need to renegotiate or cover the difference in cash.
7
Clear to Close (CTC)
Once underwriting is satisfied, you receive clear to close. You will receive a Closing Disclosure (CD) at least 3 business days before closing, detailing your final loan terms and exact closing costs.
8
Closing Day
You sign all final documents, pay your down payment and closing costs, and receive your keys. The lender funds the loan, the title transfers, and you are officially a homeowner.
