Mortgage Tips for the First-Time Homebuyer

Understanding the home buying process can minimize your stress

Couple reviewing documents
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Buying your first home can be a daunting experience. Not only are you making one of the major purchases of your life, but trying to figure out how you’re going to pay for it and wondering if you’re choosing the right home can be overwhelming.

The best way to curb some of the anxiety is to educate yourself about the process so you know what to expect. Learn some mortgage tips and strategies that will get you through all of the prep work, so you can enjoy the homebuying journey and get excited for what your future has in store.

Key Takeaways

  • Getting your first mortgage can seem overwhelming at first, but knowing what to expect may ease some stress.
  • To see if you’re ready to buy a home and shop for a mortgage, start by assessing your personal financial situation and credit profile.
  • There are different types of mortgages to consider, and it’s important to compare lenders to find the right loan for you.
  • Staying organized and understanding what will happen during each step of the mortgage process will help things go smoothly.

Review Your Credit

Before you try to get approved for a mortgage, you should know where you stand in terms of credit. Your credit history is one of the major factors lenders will evaluate when deciding if they’ll offer you a home loan, and at what interest rate. Step one is getting a look at your free credit reports from each of the major credit bureaus: Experian, Equifax, and TransUnion. Just go to AnnualCreditReport.com to download.

These reports, along with your credit score (which you can most likely get for free through credit card companies or your bank), provide a snapshot of your creditworthiness and how you manage debt. Even better, if your score isn’t where you want it to be, you’ll discover which aspects of your credit need improvement so you can make the appropriate changes.

If you spot any errors, clean those up first by contacting the bureaus or creditors that have reported mistakes. Once that’s done, see if there are ways to improve your credit score, such as clearing any past delinquencies and paying down high balances. It’s also important to keep paying your bills on time each month.

Determine Your Budget

Taking a long, hard look at your finances is crucial when you want to buy your first home. You’ll need to have a realistic picture of how much money you can put down on a house, and how much house you can buy (i.e, how big of a home loan payment you can afford).

Remember, you’re not just making principal and interest payments—you’ll also be paying property taxes, home insurance, and possibly private mortgage insurance (PMI), depending on the loan program and what you put down.

“PITI” is the acronym used for “principal, interest, taxes, and insurance,” which will comprise the four elements of your monthly mortgage payment.

Try crunching the numbers with a mortgage calculator, using your income and monthly expenses. This can help you determine a price range for your home shopping.

Start Saving Early

The more time you have on your side, the more you can save to put toward a home. A larger down payment can be helpful in a few ways. For starters, you’ll be borrowing less, so your monthly mortgage payment will be lower.

In addition, increasing your down payment can make you a more attractive buyer, which can help in a tight real estate market. It may even help you score a lower interest rate. And if you are able to put down 20%, you can avoid having to pay PMI.

That said, in the months or years before buying a home, making a commitment to save as much as possible by keeping a lean budget can help you make headway.

Understand Mortgage Differences

The good news is that there are different types of mortgages available, as well as different loan structures, so it’s likely there’s a program that will work for you if you meet minimum requirements. Major loan programs include the following.

Government-Backed Loans

  • FHA: The Federal Housing Authority offers these loans to people who do not have the best credit scores, or who can only make a 3.5% down payment.
  • VA: These loans are only for active service members or retired veterans. They offer excellent rates and have less-stringent requirements than most other loan programs.
  • USDA: Those in rural areas may qualify for this type of loan, but there are income and location requirements.

Conventional Loans

This is the term to describe loans that are not government-backed. Most of these loans are sold to Fannie Mae or Freddie Mac. Credit and income standards are usually a bit higher for these loans, but rates are competitive.

Besides loan type, there are also different loan structure options:

  • Term length: Most people get a 30-year mortgage, but there are other terms available if you have the means (40-year, 20-year, 15-year, etc.). The longer the term, the more interest you’ll pay over the life of the loan, but your monthly payments will be lower.
  • Fixed vs. adjustable rate: Fixed-rate mortgages have the same interest rate over the life of the loan. Adjustable-rate mortgages (or ARMs) start off at a lower fixed rate to start, then fluctuate at specific points in time.

Even though your interest rate will not change with a fixed-rate mortgage, your total monthly payment can still fluctuate since your property taxes, homeowners insurance, or mortgage insurance might go up or down.

In addition to the mortgage type, ask your home loan professional if there are any first-time homebuyer programs or down payment assistance programs that you may qualify for.

Get Pre-Approved

Once you determine that you’re ready to move forward, it’s time to seek a preapproval letter (sometimes called prequalification) from a lender. This helps illustrate that you’re a serious buyer when you begin looking around, plus it gives you a benchmark idea of how much home you’ll be able to afford.

To get preapproved, you can visit a lender in person, call, or go online. You’ll have to provide your basic income and financial information, and they will do a credit check. Within a short amount of time, they’ll give you an estimate of the loan amount you could get and the interest rate you’d qualify for.

A preapproval doesn’t guarantee that you will be approved for the actual home loan, since that process is more in-depth.

Compare Lenders

When making any large purchase, it’s important to shop around—and that’s especially true for home mortgages. Each lender’s terms, rates, and fees can vary widely. Some lenders may specialize in a particular loan program, while some are better at helping first-time homebuyers navigate the process.

Aim to get a few loan estimates from different lenders so you can do a full comparison. You can do this on your own or by working with a mortgage broker who will do the legwork for you.

When comparing home loans, consider the full picture beyond the interest rate. For example, pay special attention to the annual percentage rate (APR). APR is the interest rate plus additional fees and points that you’ll pay, so it gives a fuller picture of the true cost of the loan.

Find a Home Within Your Means

When buying your first home, you may not realize some of the hidden expenses of home ownership. That’s why just because you’re preapproved for a $600,000 loan doesn’t mean you should borrow that much. Ideally, you should borrow less so you can maintain a financial cushion to cover other expenses that will come up.

For starters, consider the condition of the home and additional purchases you’ll need to make. An older house might require some upgrades, renovations, or new appliances, while a new-construction home might need new fencing around the property and window treatments.

Some common home-ownership expenses to keep in mind include:

  • Monthly costs such as electricity, gas, cable, and water
  • ​​Regular maintenance and repairs
  • Upgrades (if needed)
  • Furnishings and appliances

Don't Make Any Large Purchases During the Process

Once you go into contract on a home, keep your finances as clean as a whistle. Avoid doing things before closing that will alter your cash-reserves balance or impact your credit score in any way. In other words, refrain from making any major purchases or opening new lines of credit in the months leading up to your closing date.

Even a small drop in a credit score or spending money earmarked for your down payment could jeopardize your final approval. You should also hold off on changing jobs or banks during this time since lenders look for stability.

Have Everything Ready

During the mortgage underwriting process, you may be asked to submit documents (even ones you already turned in when you first applied). Try to keep everything organized and accessible so you don’t delay the closing. Some of the things you should keep on hand are:

  • Your most recent tax returns
  • Recent pay stubs
  • Bank statements
  • W-2 or I-9 forms from the past two years
  • Proof of any other sources of income
  • Debt details, such as an auto or student loan

Review Your Closing Documents

Three days before you close on your home, the lender will send over a Closing Disclosure, which is a breakdown of your loan terms and the closing costs. Review it very carefully and compare it to your loan estimate to make sure that everything looks correct. Don’t hesitate to ask any questions if something doesn’t seem right.

Also, confirm any other details regarding your closing and what you’ll need to bring with you, such as a cashier’s check.

Frequently Asked Questions (FAQs)

How do you pay off your mortgage faster?

Applying extra payments to your mortgage can help fast-track the payoff. One strategy that is popular is paying every two weeks instead of every month. With 26 half payments versus 12 full ones, you’ll end up making one extra payment per year. Another option is just to pay a little extra when you have the means. Some people may decide to refinance their loan to a shorter term.

When is your first mortgage payment due?

Your first mortgage payment is typically due the first day after the first full month after you close on the house. So if you close on June 10, your first mortgage payment will be due on August 1.

What are points on a mortgage?

Mortgage points, sometimes called discount points, are an upfront fee you pay as part of your closing costs in exchange for a lower interest rate. One percent of your loan is one point. So if you have a $300,000 mortgage, one point would cost $3,000. It’s common for each point to reduce your interest rate by .25%, but that can vary by lender.

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Article Sources

  1. Consumer Financial Protection Bureau. “Check Your Credit.”

  2. Consumer Financial Protection Bureau. “What Is PITI?

  3. Consumer Financial Protection Bureau. “What Is Private Mortgage Insurance?

  4. Consumer Financial Protection Bureau. “FHA Loans.”

  5. Consumer Financial Protection Bureau. “Get a Prequalification or Preapproval Letter.”

  6. Consumer Financial Protection Bureau. “Budget for New or Changed Expenses."

  7. US Bank. “Your Guide to the Mortgage Underwriting Process,”

  8. Chase. “Monthly vs. Biweekly Mortgage Payments.“

  9. Consumer Financial Protection Bureau. “What Are (Discount) Points and Lender Credits and How Do They Work?

  10. Chase. “Mortgage Points.”