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First-Time Homebuyers’ Guide to Getting a Mortgage

For many, purchasing a home is a quintessential part of the American dream. Owning a home is exciting, but the road to getting there can seem daunting and even more so for first-time homebuyers. This guide is designed to provide support so that you can head into the home buying process with confidence. 

Goodbye rent, hello mortgage

Unless you have enough cash to cover the entire cost of a home, you’ll need a mortgage. A mortgage is a valuable financial product and makes purchasing a home possible for most first-time homebuyers. 

What is a mortgage?

A mortgage, or home loan, is a loan that is used to buy a home. As with most bank loans, you agree to repay your loan with interest throughout the term (i.e., duration) of the loan. Once the loan is fully paid, the home fully belongs to you. Mortgages are available through banks and other types of lenders. 

Types of mortgages

There are several types of mortgages, each with different features. When considering which loan is right for you, here are some questions to ask yourself:

  • How much down payment can I afford?
  • What monthly payment can I afford?
  • How long do I plan to stay in my home?
  • How is my credit?
  • Do I anticipate earning a higher income within a few years?

The following are some of the most common types of mortgages:

Adjustable Rate Mortgage (ARM) 

An adjustable rate mortgage is a variable rate loan. The rate is fixed for an initial period and then it will increase or decrease at predetermined intervals. For example, a 5/2 ARM means the rate will remain fixed for the first five years and can adjust twice every year thereafter. The value of ARMs is that the interest rate for the initial fixed period is often lower than with other types of home loans.  

Best if: You’ll be in your home for only a few years or if you anticipate your income increasing in the future. 

  • Typically offers a lower initial interest rate 
  • After the initial period, the rate adjusts periodically

Fixed Rate Mortgage

With a fixed rate mortgage, the interest rate stays the same for the entire term of the loan. If you expect to be in your home for more than five years, a fixed rate mortgage is typically the right choice. It’s also a smart option if rates are low. 

Best if: You plan to stay in your home long term and like the predictability of a fixed payment.

  • Maintains a consistent monthly principal and interest payment 
  • Protects you from rising interest rates
  • Terms are usually 15, 20 and 30 years

Federal Housing Administration (FHA) Loans

FHA loans are insured by the Federal Housing Administration and are among the most popular loans for first-time homebuyers. They require a lower minimum down payment and have lower credit qualifications. 

Best if: You need a low down payment option. 

  • Put as little as 3.5% down
  • Less stringent qualification requirements
  • Available as a fixed or adjustable rate mortgage

How to Know If You Qualify for a Mortgage

While it’s tempting to visit open houses and start scrolling for your dream home on Zillow, before you start house hunting seriously, it’s a good idea to know what qualifications mortgage lenders look for. Planning ahead can save you time and help you avoid possible disappointment. 

While qualifications vary by lender and type of loan, the following are some of the common factors considered when reviewing your mortgage application:

  • Your credit history - You’ll need a good credit score and positive payment history.   
  • Low debt-to-income ratio (DTI) - This quantifies the debt you already have relative to your monthly income. If your debt is low and your income is high, your application will be more attractive to lenders. If you’re currently renting, lenders will also look at how much rent, utilities and renters insurance you pay to estimate how much mortgage you can afford. 
  • Employment history - Even if you have a sufficient down payment, lenders want to ensure that you have a steady income to maintain your monthly mortgage.
  • Down payment - The down payment is the amount of money you contribute to the purchase. A larger down payment may qualify you for more favorable interest rates.
  • Liquid assets - Lenders want to know if you have assets, such as money in a savings or money market account, that would enable you to cover your payments should you lose your job or have some other financial problem.

How to Find a First-Time Home Loan Lender

The right lender and home loan can make all the difference in how much you pay for your loan and your home buying experience. Mortgages are available from several sources, including community banks, credit unions, mortgage brokers and online lenders. So how do you choose the right lender for you? Here are some tips:

Research

Having a basic understanding of what loans, terms and rates are available can help you be a more educated shopper. Narrow down your choices to lenders that have a history of working specifically with first-time homebuyers. 

Get pre-approved 

Get pre-approval letters from several potential lenders. The letter is not a loan guarantee but shows how much a lender has approved you to borrow based on your current savings, credit and income. 

Not only are pre-approval letters helpful for giving you an idea of how much you can borrow, they also give you a way to compare lenders.  

Understand the details

When comparing lenders, evaluate all of the fees. From closing costs to points, you may uncover expensive details hidden in the fine print. Sometimes a bank will have a low-interest rate and then “surprise” you with high closing costs. 

Decide what’s important to you

You’ll also want to consider your priorities. For example, a community bank understands local market conditions, may offer greater flexibility in approving loans, and provides a level of personal service that big banks and online lenders can’t. If you’re a first-time homebuyer, have credit issues or need to close quickly, choosing a community bank as your lender may be a good move. 

 

The Mortgage Process Step-by-Step

 

 

  1. Estimate how much home you can afford
    Keep in mind the principal, interest, taxes, insurance, and ongoing housing costs (such as utilities, maintenance, etc.) that may increase from what you’re paying now.  Look at your savings, how much you will be putting down and how much you’ll need to borrow. 

  2. Get a pre-approval letter
    Before house hunting, get a pre-approval letter from a lender. It can establish your credibility with a seller. 

  3. Make an offer
    Start shopping for a house and make an offer. Once your offer is accepted, you will begin the mortgage application process. 

  4. Apply for a mortgage
    If you have several pre-approval letters, review your final estimates and select your lender. Submit your application online, by phone or visit a lender in person. Get all your questions answered and don’t feel pressured. It’s the lender’s responsibility to help you.  

  5. Mortgage processing and underwriting
    The lender will need to verify your income, credit, debts, etc., to approve your loan. Be patient - this takes time and involves paperwork, documents and more paperwork. Some of the documents you’ll need to provide include: 
    • W2s
    • Pay stubs
    • Tax returns
    • Bank account statements

  6. Closing day
    The exciting day is here! Get ready for more documents from disclosures to declarations to the deed. Your lender will let you know what to expect and guide you until you’re handed the keys to your new home!

We Help First-Time Homebuyers 

Ready to buy your first home? Fremont Bank’s friendly local agents are here to help. We have many mortgage choices and a straightforward Mortgages Without the MysterySM loan process. See how our attractive rates, low down payment options, complimentary pre-approval letters, and tailored service can put your dream of homeownership in motion.

Get started here.