What Is a Mortgage and How Does It Work?

Published on April 21, 2020 | 3 min read | Webster Bank
Last updated: May 22, 2025

So you’re going house shopping. That’s fun. But if you’re like most people, you’ll also need to shop for a mortgage to help you pay for that new house. Let’s take a look at how a mortgage works and what you’ll need to get one.

Understanding mortgages

A mortgage is a loan that you acquire from a lender to buy or refinance real estate, such as a house or land. The lender gives you a lump sum of cash to make your purchase, and you agree to pay the lender back with monthly payments over a set term of years. These payments will cover the principal (the lump sum the lender advanced you) plus interest and other fees such as property taxes and insurance.

How does a mortgage work

Mortgages are secured loans, backed by collateral, in this case the house itself. You typically need to make a down payment, putting some of your money into the house upfront. How much you’ll need depends on the lender and type of mortgage you want.

To get your mortgage, you’ll need to apply to a lender and provide information on the house you want to buy and your financial situation, including income, debt levels, and credit score.

Key Mortgage Lending Calculations

Your lender will use a series of calculations to determine your creditworthiness, which affects, in turn, whether you qualify for a mortgage and the specific interest rate and terms you can get. Higher creditworthiness can earn you lower interest rates and more flexible terms.

Loan to Value

Loan to Value (LTV) is a ratio of what you’re able to borrow compared to the home’s market value. Most lenders offer the best rates on mortgages with up to 80 percent Loan to Value. This means if your home’s market value is assessed at $300,000, you would need to borrow $240,000 or less to have an LTV equal to or less than 80 percent. Some lenders, like Webster Bank, will allow higher LTV percentages for qualified borrowers, although terms or pricing may differ.

Debt to Income

Your debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes toward paying off debt, such as credit card minimum payments, car loans, student loans, and the estimated payments for your new mortgage, including taxes and insurance. DTI does not include regular monthly expenses such as food, utilities or health care. Each lender and situation is different, but typically a ratio under 50% is necessary. In other words, if your gross monthly income is $5,000, your monthly debt should not be more than $2,500. However, a lower DTI is preferable and may earn you better terms, depending on the lender. You’ll want to keep your DTI as low as possible in any case, because it affects your credit score as well.

Credit Score

Your credit score will play a big role in whether your lender can approve your loan. It will also influence the interest rate you receive. Generally speaking, higher credit scores equal lower interest rates. The biggest factors in your credit score are your level of debt and whether or not you pay your monthly bills on time, but there are other influencing factors as well. It’s important to keep an eye on your credit reports and take action on any false entries that could lower your score.

You Don’t Need to Go it Alone

Applying for a mortgage can seem like an overwhelming process, but it doesn’t have to be. Webster Bank Mortgage Banking Officers are ready to work with you to find the best mortgage solution for your needs and provide guidance through the application process. Connect with us today.