Demystifying the Difference Between Home Loans and Mortgages

Getting a home loan or mortgage can be a confusing process for first-time homebuyers. You may have heard the terms “home loan” and “mortgage” used interchangeably. However, while related, they are not exactly the same thing. Understanding the key differences between a home loan and a mortgage can help you make the best financing decision when purchasing your first home.

What is a Mortgage?

A mortgage is a type of loan specifically used to purchase real estate The mortgage lender provides financing for the buyer to purchase a home or other property. The purchased home serves as collateral for the mortgage loan This means if the borrower defaults on the loan, the lender can seize the home through the foreclosure process.

Some key features of a mortgage include

• Used for purchasing real estate, usually a primary residence
• Secured by the property being purchased
• Requires a down payment, typically 10-20% of purchase price
• Has a set repayment schedule with monthly payments
• Offered by banks, credit unions, mortgage lenders and brokers
• Can be a fixed or adjustable interest rate

Mortgages make homeownership more accessible by allowing buyers to finance a large purchase over an extended period versus paying all cash up front. There are many different types of mortgages available to suit different buyer needs.

What is a Home Loan?

A home loan, sometimes called a home mortgage loan, is a specific type of mortgage used to purchase a residential property that the buyer intends to use as their primary residence. The home serves as collateral for the loan.

Some features that distinguish a home loan from other mortgages:

• Used to purchase and finance a primary residence
• Requires homeowner’s insurance
• Subject to limits on loan amount based on location
• Eligible for certain tax deductions related to home ownership
• Provides more flexible qualification guidelines than investment property loans

Home loans are designed for owner-occupied residential properties versus rental properties or vacation homes. All home loans are mortgages, but not all mortgages are home loans.

Key Differences Between Mortgages and Home Loans

While home loans fall under the mortgage category, there are some notable ways they diverge from mortgages in the broader sense:

Purpose

• Mortgage: Can finance any type of real estate purchase

• Home Loan: Specifically used to buy a primary residence

Property Type

• Mortgage: Applies to residential and commercial properties

• Home Loan: For single-family homes, condos, townhomes

Occupancy

• Mortgage: Doesn’t dictate property occupancy

• Home Loan: Owner must occupy home as primary residence

Loan Limits

• Mortgage: Varies; higher limits for investment properties

• Home Loan: Capped based on conforming loan limits

Tax Benefits

• Mortgage: Limited tax deductions

• Home Loan: Eligible for mortgage interest and property tax deductions

Qualifications

• Mortgage: Higher credit score and down payment for investment properties

• Home Loan: More flexibility for owner-occupied primary residences

Insurance Requirements

• Mortgage: Insurance optional unless required by lender

• Home Loan: Mandatory homeowner’s insurance

While mortgages finance real estate purchases broadly, home loans have special requirements and benefits for financing owner-occupied primary residences versus other property types.

Common Types of Home Loans

There are a few main options when it comes to home loan types:

Conventional Loans – Offered by private lenders without government backing. Require a 3-20% down payment and have limits on loan amounts.

FHA Loans – Insured by the Federal Housing Administration. Require only a 3.5% down payment. Ideal for buyers with less savings.

VA Loans – Provided by the Department of Veterans Affairs for eligible military members. Feature a 0% down payment option.

USDA Loans – Backed by the U.S. Department of Agriculture for properties in rural areas. Also offer 0% down payment terms.

Jumbo Loans – Offer higher loan amounts above conventional conforming loan limits for pricier homes. Require larger down payments, typically at least 20%.

Home Loan Qualification Criteria

When applying for a home loan, lenders will evaluate these key factors to determine your eligibility:

• Credit score – Minimum scores vary by loan type, generally 640+ recommended. Shows your creditworthiness.

• Down payment amount – Conventional loans need at least 3-20%. Government programs offer lower down payment options.

• Debt-to-income ratio – Compares your total monthly debt payments to gross monthly income. Ideal ratio is below 50%.

• Loan-to-value ratio – Compares loan amount to appraised home value. The lower the better.

• Employment history – Shows reliable income to repay the loan. Typically want 2+ years at the same job.

Meeting the lender’s qualification criteria is key to securing favorable home loan terms and interest rates.

The Home Loan Process

If you’re ready to move forward with a home loan, these are the usual steps:

1. Check credit reports and scores. Address any issues to improve your credit.

2. Get pre-approved by submitting financial docs for initial underwriting.

3. Shop for homes within your approved price range and make an offer.

4. Select a home inspector and appraiser to assess property condition and value.

5. Complete loan underwriting and final approval once property is selected.

6. Review closing disclosures detailing final loan terms.

7. Sign documents and provide down payment at closing.

8. Make your first mortgage payment within 30 days of closing.

It can take 30-60+ days to close on a home loan once your offer is accepted. Having your financial records in order from the start will make for a smoother underwriting process.

The Takeaway

While often used synonymously, home loans and mortgages do have some distinct differences. At its core, a home loan is a form of mortgage financing specifically for purchasing your own primary residence versus other property types.

Understanding the unique benefits, criteria, and options for home loans will empower you to make the best financing decision when you finally join the homeowner club. Do your homework on both mortgages and home loans so you can shop lenders with confidence.