First Time Homebuyer Tips

4/28/2022

Young woman and man in a room holding keys to new home

Buying your first home is exciting, but it can also be stressful. With so many factors to consider, such as how much you can afford to pay for a home, what mortgages are available for first-time buyers, and much more, it can be overwhelming.

If you’re a first-time homebuyer, trying to navigate your way through the buying process and finding the best mortgages for first-time buyers can feel like trying to find your way in the dark. The good news? With a few first-time homebuyer tips ready, the process won’t seem nearly as daunting – and the first tip is understanding the mortgage process. But first, let’s go over the different types of mortgages out there.

Types of Mortgages Available for First Time Homebuyers

Depending on your unique situation, you’ll be presented with several different types of mortgage loans for first-time buyers, including:

Conventional Mortgages

Conventional mortgage loans are known as “conforming” loans, which means they conform to the Federal Housing Finance Agency (FHFA) under which Fannie Mae and Freddie Mac purchase mortgages. Conventional loans are suitable for first-time buyers who have good credit and can make a down payment.

Requirements

A down payment is typically between 3%-5%
Private mortgage insurance (PMI)
A credit score of 620+
A debt-to-income ratio of 50% or lower
The loan must fall within the loan limits set by Freddie Mac and Fannie Mae

Fixed-Rate Mortgages

These are mortgage loans that have a fixed interest rate for the entire term of the loan. These are an excellent option for first-time buyers looking into different types of mortgages and loans and those who want to know what they will be paying every month.

Requirements

Minimum down payment is typically around 3%
A minimum credit score of 620
Debt-to-income ratio of no more than 50%
Finances for closing costs (between 2-6% of the purchase price)

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) is a loan that offers a lower interest rate than a fixed-rate mortgage. These loans allow you to pay less interest initially but will adjust periodically over the life of the loan. This means that your monthly payments may increase over time.

Requirements

A minimum down payment of typically up to 3%
A minimum credit score of 620
A debt-to-income ratio of no more than 50%

Jumbo Mortgages

Jumbo mortgages are also known as conventional mortgages that exceed the maximum loan limit set by Freddie Mac and Fannie Mae, and in 2022, the limit is set at $647,200. These loans are great for those who have good credit and can make a sizeable down payment.

Requirements

A down payment greater than 10%
A minimum credit score of 680
A debt-to-income ratio (DTI) of no more than 45%.
Finances for closing costs (between 2-6% of the purchase price)
A maximum loan-to-value ratio (LTV) of 89.99%

Government Insured Mortgages

A government-backed mortgage is a loan insured by a federal government agency. These loans are offered by private mortgage lenders and offer several different types of mortgages loans for first-time buyers, including:

FHA Loans: Most accessible loan, though requires a minimum credit score of 580 and a down payment of 3.5% of the purchase price of the home OR 10% for those with a credit score of 500-579. You’ll also need to pay an upfront mortgage insurance premium of 1.75% of the loan amount, along with an annual premium of 0.45% to 1.05%.
USDA Loans: Backed by the Rural Development Guaranteed Housing Loan Program for limited to low- and moderate-income borrowers. While there is no down payment requirement, you will need to pay an upfront mortgage insurance premium of 1%, with an annual premium of 0.35%
VA Loans: the most restrictive government-based loans. You must be an active-duty service member/veteran, eligible spouse of a veteran, or a U.S. citizen who served in the armed forces of a government allied with the U.S. during World War II. No minimum credit score is required, and you’ll face an upfront funding fee at closing of between 1.4% to 3.6% of the loan amount.

Now that you know what types of loans are available for first-time homebuyers, let’s dig into how to get one.

How to Apply for a Mortgage as a First Time Homebuyer

One of the biggest first-time home buying tips is learning how mortgages work. While it may seem confusing at first, the mortgage process is fairly straightforward.

With the help of a professional mortgage team, you won’t get overwhelmed with the process of applying for a mortgage because these individuals understand all the ins and outs of the mortgage industry, making them an excellent resource for understanding the homebuying process.

A few things you’ll need to have ready include:

Your personal financial information, such as your income, employment information (pay stubs, W-2s, or other proof of income), and your tax returns
Bank statements (to verify assets)
Your renting history, if applicable
Photo ID

Your lender will be able to tell you if any other important information is needed. Once you’ve accumulated the necessary documents, you can then move on to the application process.

Preparation

You need to start researching the various mortgage programs available to first-time homebuyers. You’ll want to discuss your options with your mortgage team and how to best prepare your credit score to ensure you’re getting the best rates possible.

Some of the most essential first-time homebuyer tips include getting pre-qualified for a mortgage. Pre-qualifying for a mortgage means you have a general idea of how much you can afford to spend on a mortgage and what you need to qualify. Your mortgage team will be able to review your financial situation and help with this. It is a great way to get a sense of your financial situation and start the homebuying process.

Review Loan Estimates

Your mortgage team will be able to provide you with a range of home loan estimates based on your financial information and the documentation you’ve provided. You’ll want to make sure you’re comfortable with the numbers before moving on to the next step.

Fill Out Mortgage Loan Applications

Once you’re comfortable with the home you can afford and have gathered your documents, you’re ready to move on to the application process.

Your first step is to fill out the basic information section of the application, which will ask for your personal information, such as your address, contact information, and income.

Next, you’ll be asked to fill out your financial information. This is where you’ll want to be thorough with your documentation. The more documentation you can provide for your income, such as pay stubs, W-2s, or other proof of income, the better.

After you’ve filled out your financial information, you may be asked to provide additional documentation, such as income for your partner, your bank statements, and your rent history, if applicable.

Finalize Necessary Paperwork

After you’ve submitted everything asked for on the application, your mortgage team will go through the process of underwriting and finalizing your loan. This is a great time to ask questions and get more information about the homebuying process. Once your loan is approved, you can proceed to the payment and closing costs process.

Your mortgage team will help you navigate the closing process and walk you through what documents must be completed and submitted.