As a first-time home buyer, understanding what a mortgage is and how it works is essential to buying a home. In this guide, we’re going over everything you need to know about mortgages as a first-time home buyer.
This article was written in collaboration with Mike Harvey of Vantage Point Mortgage for insights and expertise to help home buyers secure mortgages in the 2023 real estate market.
A mortgage is a loan that is secured by real estate. Mortgages allow consumers to finance a large percentage of a real estate purchase and if the consumer fails to pay back the loan, the bank has the right to take the property.
Mortgages come in many different types and can have different terms, but the most common mortgages are 30-year and 15-year fixed terms. For a 30-year mortgage, a borrower agrees to pay monthly payments, with portions going towards interest and principle that leads to borrowers building equity in a property until the loan is paid off.
When applying for a mortgage, lenders will verify many factors of a borrower's creditworthiness. The main factors are credit (checking someone’s credit score and credit history), capacity to pay back the loan (banks will verify monthly income and the stability of that income), capital(the money needed for your down payment and closing costs), and collateral which is the home that someone is buying(an appraisal will be conducted to determine the fair market value of your property).
Applying for a mortgage can usually be done online now, but still requires some planning ahead. Sometimes additional information may be needed to determine if you qualify for a loan, and this can delay the process a bit.
If you don't want to be pressed for time to complete your applications once you've found a home you love, it's a good idea to go through the process ahead of time. Whether you're buying a home on your own or with a partner, applying early can let you see if you'll be approved and if there's anything you can do to put yourself in a better position once the time to buy comes around. A loan approval will also guarantee that you'll be able to work with the real estate agent of your choosing, as some agents do not show clients homes without a loan approval. A good loan officer can guide you through this process and help make it as easy as possible.
A pre-approval is a bank’s commitment to lend based on the information you provide to them. Pre-approvals can change or be voided if something about the borrower's profile changes or is different than previously stated.
Not all pre-approvals are the same and not all lenders require the same information, so starting the application process early will be a big help. Some lenders ask for a lot of information, and some are more lenient with loans. At Vantage Point, we do require all supporting documents to issue a preapproval. We collect paystubs and employment history, bank statements, conduct credit checks, and request any other documents that may be needed to ensure a smooth loan process. It is important to work with a loan officer that you and your agent trust to ensure there are no issues with your ability to obtain financing.
The amount you are willing and able to contribute to a down payment can have a big impact on the mortgage you secure. There are multiple types of loans, each with different down payment requirements. Some loans allow for as little as 1% down payment while others may require as much or more than 25%. The down payment required will depend on your unique scenario, the property you're purchasing, and the lender you are working with.
Putting at least 20% down will let you avoid monthly mortgage insurance, though there are some loans out there that will not require mortgage insurance even below that threshold.
There can be some added benefit to putting down a larger down payment. In today’s market, a larger down payment may put a buyer in a better position to get their offer accepted by a seller. Larger down payments can allow for more leeway on appraisal values and can show an overall stronger buying profile to some sellers.
There are many different factors that contribute to and can affect your monthly mortgage payment. Usually, the largest portion of your monthly payment is the mortgage portion, which is made up of your principal and interest payments. Your loan amount and interest rate will determine what this number is.
Most people will also pay into their escrow accounts for yearly taxes and insurance each month. If your yearly taxes are $3,600 you will pay 1/12th monthly, so approximately $300. If your insurance premium is $1,200 you will pay $100/month for insurance. Additional monthly costs can include mortgage insurance, condo/HOA fees, or things like flood insurance. It's important to consider these added expenses when calculating the home you can afford.
There are various types of mortgages available, including fixed-rate mortgages, adjustable-rate mortgages (ARMs), and government-backed loans. Fixed-rate mortgages have a constant interest rate throughout the loan term, while ARMs have an initial fixed-rate period followed by an adjustable rate. Government-backed loans are insured by government agencies like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
Interest rates will determine how much you owe each month on your mortgage. Current interest rates fluctuate daily based on the movement of the market. While there is not a direct correlation, rates can closely follow the ups and downs of the 10-year treasury bills.
While there is an overall market average, your specific interest rate on your mortgage will be determined by a combination of things. These include the current market rates, your credit score, the size of your down payment, the property type you're buying, the type of loan you want, and potentially other factors. It is important to know you are working with a lender that has favorable terms for your exact loan scenario and property type as loan options and terms may vary.
There are a few ways to make sure you get the best rates and long-term benefits of a mortgage as a first-time home buyer. Let's take a look at a few of them from maximizing your credit score to taking advantage of mortgage assistance programs.
Your credit score is very important when applying for a home loan. It determines what programs you have access to and lower scores often translate to higher rates and fees.
Many home buyers wonder, “Will this inquiry have an impact on my credit score?” Yes, having a hard inquiry on your credit will temporarily have a minor impact on your credit score. Since lenders look at credit scores in brackets, a small drop of a few points usually changes nothing. Borrowers with 760 scores and above are often looked at the same so someone with an 800 score does not need to worry about their score dropping to 797, their score is still considered perfect. Requesting a credit inquiry is truly the only way to know your score and overall credit profile. When a credit report is pulled, it is good for 120 days before it expires and needs to be reissued. Those with lower scores might want a professional to review their credit reports to advise them if anything needs to be fixed or looked into further.
We usually recommend going through the full loan application including a credit check upfront so there are no surprises when your dream home pops up. We have seen many scenarios where potential buyers are scrambling on a Friday afternoon to gather documents or look into negative items on their credit report that they had no idea existed.
To determine the "right" down payment amount, it's important to consider your goals, financial standing, and the impact of your down payment.
All loans have a minimum down payment requirement. Even if the minimum down payment required is 0%, a lower down payment can also lead to higher rates and fees and a higher monthly payment. Work with your loan officer to go over the different down payment options at your disposal and show the impact on potential cash needed at closing, your monthly payment, and the offer that will be most attractive to sellers. After all, you want your offer on your dream home to be accepted!
Some buyers want to put 20% down to avoid mortgage insurance. When buying an investment property, a 30% down payment often gets you better loan terms than a 25% down payment. For larger homes, it may be better to put enough money down to avoid a Jumbo loan. There are many factors like this that you'll need to evaluate to make the best decision for you.
Forget this, just call me! But in all seriousness, it’s important to be confident you are receiving competitive terms with a reliable lender. While an interest rate is important, it should not be the only factor considered when picking a lender and loan originator. In the current real estate market it is most important to make sure all parties are communicating and putting you in the best position to have your offer accepted. That includes you, your agent, and your lender!
While there are many great loan options with low down payments that allow for seller's assistance and lender credits, there can also be additional resources such as assistance programs available for certain areas or borrowers. Oftentimes these borrowers need to meet secondary qualifications, but for all borrowers, it is important to know your realtor and loan officer are exploring those options. These programs can contribute anything from $1,500 off your closing costs to lower interest rates or $10,000 grant programs. It's worth a shot!
This mortgage calculator is a great place to start. Once you have a sense of what to expect, get in touch with a lender to learn more about your options and feel confident in the loan process!
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