What Is a Mortgage Loan?
A mortgage is a loan used to purchase real estate, often a primary residence. When you sign a mortgage loan, you agree to repay a certain amount each month plus interest for the term of the mortgage. Most mortgages last 15 or 30 years, but some lenders offer other mortgage terms.
With a mortgage, the home or property acts as collateral for the loan. If you do not make payments, the lender can eventually repossess the home. If you want to change the terms of your mortgage, you can apply to refinance for a lower interest rate or shorter loan term.
Conventional mortgages require a 3% down payment. They allow you to finance a home worth up to an annual maximum established by Fannie Mae, a federally-based mortgage company. Government-backed mortgages, such as FHA, VA, and USDA loans, have less strict approval requirements, so they are popular among first-time home buyers. Jumbo mortgages exceed the threshold for conventional mortgages.
What Should a First-Time Home Buyer Look Out For?
These are some of the most important considerations for first-time home buyers:
Setting a realistic budget for your mortgage based on your income and expenses
Making sure you dispute inaccurate items on your credit score
Researching first-time home buyer programs in your state if you need down payment or closing cost assistance
Having an emergency fund set aside for home repairs and other unexpected expenses
Deciding on a neighborhood and looking at homes in your budget
Getting a home inspection to check for serious issues with the property
Purchasing homeowner’s insurance to cover the value of your property and belongings
Finding a real estate agent who can help you narrow your search for the perfect home
How to Apply for a Mortgage Loan as a First-Time Home Buyer
Getting preapproved is the first step to get your first mortgage. You submit a short application with your financial information, such as income, and personal information, such as Social Security number. Lenders should only do a “soft” credit check at this stage, which does not affect your credit score.
Using these details, lenders provide a preapproval letter with your estimated mortgage amount, interest rate, and other terms. However, these terms may change when you complete the final application.
Shopping around can help you find the best rates. You can also save time by using online lending platforms such as Credible and LendingTree so you can compare multiple mortgage offers instantly.
Once you decide to move forward with a loan offer, you must complete the entire application. The lender will also ask for supporting documentation as your application enters the underwriting process. You must provide pay stubs, tax forms, bank and credit card statements, investment statements, and employment verification. Assuming all your information checks out, your loan will close and you can take possession of your new home.
How Does the Mortgage Loan Process Work?
If you’re a first-time home buyer, the mortgage process can seem complex. Once you submit all supporting paperwork, your loan will enter the underwriting process. The lender will check to make sure you have the credit and income to repay the loan and confirm other aspects of your application.
The lender will also verify your down payment and funds for closing. The underwriting agent will confirm the source of large deposits in your account and confirm that you have cash reserves. Many lenders require savings of at least two to three times your monthly mortgage amount in reserve to complete the underwriting process.
During the mortgage application process, the bank will order an appraisal of the home. They want to make sure its value exceeds the amount of the mortgage loan. You may also want to have a home inspector evaluate the property before you move forward with the purchase. Some mortgages, such as FHA loans, require the borrower to get a home inspection.
Three days before the scheduled closing date of your mortgage, the lender must provide the closing disclosure. This legal document provides the final terms of the loan as well as the total closing costs. If the disclosure meets your expectations, you make your down payment and closing costs at settlement, where you receive your keys and take ownership of your new home.
Grants for First-Time Home Buyers, First-Time Home Buyer Programs, and the Differences Between Them
First-time home buyer grants do not require repayment. You can typically use these funds toward your down payment and/or mortgage closing costs. Often, grants provide up to 4% of the purchase price, or $12,000 for our $300,000 mortgage example above.
First time home buyer programs offer various types of assistance. Most commonly, they include down payment loans with low interest rates, deferred payment, and/or forgiveness options.
Usually, you can qualify for first-time home buyer programs and grants as long as you have not purchased a home before. Some programs accept borrowers who have not owned property in at least three years. They may also have credit score and income requirements.
Types of Mortgages
First-time home buyers can select from these common types of mortgages. Within each of these main loan types, most lenders offer either fixed-rate or adjustable-rate loans. You may prefer the stability of the constant monthly payment with a fixed-rate mortgage or prioritize the low introductory payments with an adjustable mortgage, especially if you expect to increase your income over time.
Conventional loans allow you to borrow up to a certain amount with a credit score of 620 or higher. You must have a down payment of at least 3%. Most conventional loans have 15-year or 30-year terms. Jumbo mortgages exceed the maximum amount for conventional loans. They require a higher credit score and a down payment of at least 10%.
FHA loans allow a credit score of 500 with a 10% down payment or 580 with a 3.5% down payment. These loans have a guarantee from the Federal Housing Authority and can be used to fund both home purchases and renovations.
VA loans, backed by the Veterans Administration, provide zero-down mortgages for eligible veterans, service members, and spouses.
The USDA also has a no-down-payment loan program. To qualify for this type of mortgage, you must buy a home in a rural area. The USDA mortgage also has maximum income limits depending on your family size and zip code.
How to Choose the Right Mortgage Lender for You
To find the best mortgage lender for your needs, start by checking your credit score. If you have fair credit or below, taking steps to improve your score can help you qualify for affordable mortgage terms. If you’re a first-time home buyer, you can build credit by paying bills on time, disputing inaccurate information on your report, and reducing your overall amount of debt (paying down credit cards, for example).
Once you’re ready to narrow your search for a mortgage, start with lenders who offer the type of home loan you want, or compare multiple lenders side-by-side on a site like LendingTree. Make a short list of “musts” you want in your mortgage lender, such as online servicing, limited closing costs, or a branch in your area for in-person assistance. You should also look into lenders with first-time home buyer programs available.
Check online reviews for the lenders on your list to look for potential pitfalls. When you have three to four options, complete the preapproval process to access your rates and terms. Read the fine print with your preapproval to make sure it will not affect your credit score or compromise your personal information.
Next, review the lender term sheets next to one another to determine which loan will cost you less over time. In addition to the APR, pay attention to closing costs, origination fees, prepaid interests, and other expenses that can affect your monthly payment and the total cost of your mortgage.
FAQ
What’s the difference between an adjustable and a fixed-rate mortgage?
A fixed-rate mortgage has the same interest rate for the life of the loan. Adjustable-rate mortgages (ARMs) have a low fixed rate for an initial period, often one year. The terms of your loan indicate how and when the rate will adjust. For example, a 5/1 ARM has a low fixed rate for five years and then changes every year. It can go up or down.
Will applying for a mortgage affect my credit score?
During the underwriting process, your lender will do a “hard pull” of your credit. This can lower your score, especially if you have several hard inquiries within just a few months. Over time, however, a mortgage tends to build credit by diversifying your history and establishing a good payment record over many years.
How long does the mortgage application process take?
The process varies by lender and financial situation, but most qualified first-time home buyers can close on a mortgage loan within about 30 days. The average loan closing time is just 21 days, while both LendingTree and Rocket Mortgage report that their loans typically close within 30 days.
What do mortgage lenders consider when reviewing applications?
Each lender has its own requirements for loan approval. However, most mortgage lenders require a debt-to-income ratio of no more than 43% and a credit score of at least 580 depending on the type of mortgage. First-time home buyers must also account for down payment funds and show a work history of at least two years. The property must meet the lender’s appraisal requirements.
Which mortgage term is best?
If you choose a 30-year mortgage, you will have lower monthly payments. However, the loan will cost more in interest by the time you pay it off. A 15-year mortgage has higher monthly payments but less expensive interest over the life of the loan. The answer depends on your individual situation and financial goals.