10 Steps To Get A Mortgage For First Time Buyers -The Complete Guide

Your house next to a wad of money

Getting a Mortgage loan may be hard for first-time buyers, and even for second or third-time buyers. Not only is house shopping a time-consuming endeavor, but the way to get approved for a Mortgage loan is surrounded by all types of conspiratorial theories and speculation.

That is the reason why we decided to explain in plain English every single thing about Mortgage loans. In this article you’ll find:

● Mortgages explained in plain English
● How to get your first mortgage loan step-by-step

So, let’s get started!

Everything You Wanted To Know About Mortgages

Toyhouse laying on a calculator

What Exactly Is A Mortgage
Mortgages. Also known as Mortgage loans, are the most common way for people to buy a house. There are several reasons for that, but the main one is buyers don’t need to have the money upfront.

There are mortgages specifically designed to buy or build a house, but you can also find options to remodel, refinance, or make your house energy efficient. However, most of them have similar requirements.

There are also government-backed loans, known as Federal House Administration (FHA) loans, which are designed for those with a low income or a bad credit history. Although technically the government doesn’t lend money, they only make sure an FHA-approved institution does it.

Who Can Apply For A Mortgage Loan

Female cupped hands showing paper chain family

Any citizen can apply for a mortgage loan, as long as they are of legal age according to state laws, they are legal residents of the U.S., and they have a valid social security number.

How Do Mortgages Work
The two parties involved in a mortgage loan are:

● Lender. Usually, credit institutions or banks.
● Borrower. The person looking for a loan. You can be the only borrower or a co-borrower along with your spouse.

The first thing you need to understand is that mortgages are a type of loan known as “secure loans”.

That means that a lender will give you the money you need, and you will commit to return it -plus a fee for the service (interests)-. In case you don’t pay back, the lender will take possession of the collateral -In this case the house itself- in a process known as a foreclosure.

Payments and interest rates
You will pay back through several payments, made across 10 to 30 years. Depending on the institution you choose and the type of credit, those payments can be for the same amount every month, or they can increase with time to help you reduce the number of payments. In most cases, you can make bigger payments or pay off early without any penalties.

Each payment is divided into two parts: Principal and interests.

The principal is the part of the money destined to pay back a fraction of the loan
Interests are the fee you pay to the lender. The way both things are divided on each payment is called Amortization.

Your interest rates are defined by two main things: The current market rates and the risk level for your lender. No one can change market rates, but we all can reduce the risk for the lenders and improve our chances of getting approved. Don’t worry, we’ll dig into that later.

Main Types Of Mortgages

Toyhouse next to some cash

There are several types of mortgages you can choose from. We are going to review the most common ones to show you some of their pros and cons. Keep in mind you will be tied to your mortgage for the next 10 to 30 years. Don’t be afraid of taking more than enough time to evaluate your options.

Conventional Mortgages
Usually offered by banks or other financial institutions. They can vary in requirements and interest rates, but they all ask for the same things from potential borrowers:
● Good credit score
● Stable employment and income
● Between 3% to 20% down payment

Conforming Mortgage Loans
These mortgages are bound by the limits set by the Federal Housing Finance Agency. Those limits are different for each area. The FHFA sets maximum limits for areas where home prices can go way too high, and exceed 115% of the baseline loan limit.
Non-conforming loans

Also known as Jumbo loans, because they tend to exceed conforming loan limits. These Mortgages are risky for lenders, that’s why borrowers need:
● Strong credit
● At least 10% as the down payment
● Large cash reserves

FHA Loans

man touching house on a touch screen

These mortgages are insured by the Federal House Administration (FHA) and they are meant for people with credit challenges, first time home buyers, or low income. People usually look for an FHA mortgage when conventional loans fail.

The Federal Government offers FHA-approved lenders a claim in case the borrower defaults on the loan. This way the risk for the lender is reduced and the borrower can get approved with fewer requirements.

Veteran Affairs (VA) Loans
This is the best option not only for veterans but for any person with a record of service. This is the only type of loan borrowers can get with a 0% down payment. VA loans also have fewer closing costs, better interest rates, and no need for insurance.
United States Department of Agriculture (USDA) Loans

The USDA loans are eligible only for certain rural areas and are meant for low-income borrowers since they require smaller down payments than most of the other options.

Types Of Interest Rates
Besides the type of mortgage, there are also different types of interest rates

Fixed-Rate Mortgage
Just as it sounds, under this rate, you will pay the same interest for the life of the loan.

You also can get a shorter-term fixed rate that will help you pay off faster at the cost of a higher monthly payment.

These interest rates are ideal if you rather pay the same fixed amount for the next 15 to 30 years.

Variable-Rate
Under this rate, you will pay fixed interests for the first 10 years of the loan, but after that, you will pay interest according to current market conditions.

Interest rates tend to be lower at the beginning of a loan, that’s why variable rates work great for people who don’t plan to stay in the same home, or for those who want to refinance the house after the fixed-rate period.

Getting Your First Loan Step-By-Step

African American couple researching mortgages

ONE: Plan And Save Years Ahead
Mortgages can help you get a house without the money upfront, but that doesn’t mean they are cheap. Keep in mind you will be paying interest fees every month, and still you will need some money upfront to start. Here are a couple of things you will need your savings for:

● Down payment (around 20% of the property value)
● At least 12 months of mortgage payments

Chances are you will also need an escrow account. This is a bank account that your lender will use to pay for property taxes and homeowners insurance on your behalf, during the term of the loan. Some mortgages require an escrow account, but not all of them. Keep this in mind because if you choose a mortgage without it, you still need to keep up to date with those payments on your own.

TWO: Do A Complete Finance Check-Up
Even there are instances like the FHA, not everyone gets approved for a mortgage loan. The best thing you can do is to plan years before even starting to look for a house. This way you can take measurements like:

Fixing Your Credit Score And Any Red Flag Alert In Your Credit Report
Your credit score will determine how much interest you’ll pay. The better your score, the lower the interest rate.

Lower Your Debt-to-income Balance As Much As You Can
A lower debt-to-income balance indicates you have a bigger spending capacity, therefore, the bank can lend you bigger amounts.

THREE: Evaluate The Different Mortgage Options

Family chilling in their new home

When talking about Mortgages, there is no one-size-fits-all. You need to take your time to check and evaluate all the options at your disposal. Here are some of the things to look for in a mortgage loan before committing.

Requirements
There are types of loans specific to home improvements or rural properties. Make sure the one you are looking for is appropriate for your interests and that you can fulfill all requirements.

Term Of The Loan
This is the number of years you will be making monthly payments. The most common terms are 10, 15, 20, and 30 years.

Interest Rates
If your credit score is high you’ll be able to find plenty of options with good interest rates, otherwise, your interest rates will be higher.

FHA Loans
This is a great option for first-time buyers but also people with a low income or bad credit. Keep in mind they charge mortgage insurance premiums, and the loan limits tend to be lower.

FOUR: Look For First-time Borrower Assistance Programs

Local governments and authorities sponsor different housing programs, specially designed for first-time mortgage borrowers.

Those programs can offer you a lot of benefits from financial advice to down payment grants. Take a look at the Department of Housing and Urban Development, select your state, and then click on “Homeowner Assistance” to find the programs near you.

FIVE: Get A Pre-Approval Before House Shopping

Couple reviewing mortgage conditions

Getting a pre-approval will give you some peace since that means you have good chance of getting the loan, but also because that is the best way to know how much you can count for the house.

Try to get that pre-approval from a lender that has taken a look into your profile. If your application is going to be rejected, you want it to be at the beginning and not at the end of the process.

SIX: Time To Find Your Dream House
This is one of the most exciting parts of the process. Although sometimes it can become a nightmare. Remember looking for a house is time-consuming, and there is a lot of paperwork to see and sign. Sometimes hiring a realtor can make things easier.

Get An Appraisal
Some loans, like the FHA, require an appraisal. This is important because those lenders won’t be able to approve a higher budget than the cost stated in said appraisal.

SEVEN: Read EVERYTHING

Magnifying glass over a contract

The mortgage you choose will be present in your daily life for the next several years. Remember that and take the time to read every document your lender or seller provides.

The most important things you need to check are:

Matching And Up-To-Date Information
Make sure names, addresses, and numbers are correct and up-to-date.

Loan Terms
The time you will be paying your mortgage. It could be anything between 10 to 30 years.

Interest Rate
Make sure you understand and feel comfortable with the interest rate you’ll be paying.

Closing Conditions
As you know, all mortgages are different. Some of them will require different processes, actions, and even fees for closing the loan.

Obligations And Penalties
What happens if you pay late? What happens if you move before the mortgage ends? What if something like COVID hits again and you cannot make any more payments? Check your lender and seller documentation to know about penalties or ask directly for them.

EIGHT: Buy The House

Family holding their new house’s key

After you fulfill the requirements and present the appraisal to the lender, they will give you the financing to buy the house. At this point, you and the seller should have discussed terms and conditions.

Get A House Inspection
Mortgages usually require a house inspection as part of the requirements, but if yours doesn’t, still is a very good idea to get one. That is the best way to know the actual conditions of the house.

NINE: Get Ready For 15 To 30 Years Of Rigorous Monthly Payments

The objective of intensive research before getting a mortgage loan is to make the monthly payments as friendly as possible. When deciding about the type of loan and interest rate, choose the option you know for sure won’t be a problem in the future.

You may think you can make bigger monthly payments, but also remember buying a house brings new and bigger expenses, and probably you will need new loans in the next 10 to 30 years.

TEN: Closing Your Mortgage

When looking for a mortgage, make sure you understand the process and the costs of closing the loan. Some institutions roll the costs into the monthly payments while some others require payment at the end.

Double Check Everything
Again, make sure to pay attention to every document. Double-check names, dates, numbers, and records.

Check Your Escrow Account
Make sure there is enough money in your escrow account to pay for the remaining property taxes and check if you have any positive balance on it.

Conclusion

Couple opening thor new house door

First-time buyers have a lot of options to find the right mortgage for them. Although every mortgage is different, getting to understand how they work is the best thing you can do before committing.

If your credit score won’t let you access a regular mortgage, maybe you want to take a look at all the benefits from an FHA loan here [ “FHA Loans Explained”]

Do you still have questions about how to get a mortgage for a first-time buyer? Follow us on social media and ask our team! We would love to help you.

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