As a first-time homebuyer, the process of getting a mortgage can seem overwhelming.
Here are some of the most common questions I had when starting my home loan journey:
- What credit score do I need to qualify for a mortgage?
- How much down payment will I need to put down?
- What mortgage loan programs should I look into?
- How much house can I afford with my income?
- What fees and closing costs will I have to pay?
- How can I improve my chances of getting approved?
- What documents will I need to provide?
- How long does the mortgage process take from start to finish?
- What are the different types of mortgage loans?
- What are mortgage rates and how do they work?
Knowing the answers to these questions will prepare you to shop for a home loan with confidence.
Read on for my guide to getting through the mortgage process as a first-time homebuyer.
What credit score do I need to qualify for a mortgage?
Your credit score is one of the main factors lenders look at to determine your eligibility for a home loan. Here are some general credit score guidelines:
- 760+ – Excellent credit. Qualifies you for the best mortgage interest rates.
- 740-759 – Very good credit. Most lenders require a minimum score in this range.
- 720-739 – Good credit. May qualify for a conventional loan with decent rates.
- 680-719 – Fair credit. May still qualify but will get less than ideal rates.
- 640-679 – Poor credit. Unlikely to be approved by most lenders.
- 639 or below – Very poor credit. Does not meet minimum requirements.
Some tips for boosting your credit score before applying:
- Pay all bills on time
- Pay down balances on credit cards and loans
- Dispute any errors on your credit reports
- Limit new credit inquiries
Shopping around for lenders that offer mortgage programs for lower credit scores may improve your chances as well. Federal Housing Administration (FHA) loans allow scores as low as 580 with a 10% down payment.
How much down payment will I need to put down?
The down payment is the amount you pay upfront towards the purchase of your home. Traditional conventional loans typically require 20% down. Here are some common down payment options:
- Conventional 20% – Avoid paying private mortgage insurance (PMI). Get better rates.
- Conventional 10% – Pay PMI until you build 20% equity.
- Conventional 5% – Limited options. Must meet income limits.
- FHA 3.5% – Popular low down payment program. Pay mortgage insurance.
- VA 0% – No down payment required for eligible veterans.
- USDA 0% – No down payment loans for rural properties.
Some first-time buyer programs allow down payments as low as 3%. Save for a larger down payment if possible to get more favorable loan terms.
What mortgage loan programs should I look into?
The main types of mortgage loans are:
- Conventional – Provided by private lenders. Require good credit.
- FHA – Insured by the Federal Housing Administration. Low down payments.
- VA – For veterans and active duty military. Zero down payment.
- USDA – For rural properties. Zero down payments.
- Jumbo – For luxury homes above conforming limits. Require large down payments.
Government-backed FHA and VA loans provide the easiest financing for first-time buyers with lower credit scores or down payments. USDA and state/local down payment assistance programs are also worth exploring.
How much house can I afford with my income?
Lenders generally recommend spending no more than 28% of your gross monthly income on your mortgage payment (principal, interest, taxes, and insurance). Get pre-approved to see the home price range you can qualify for based on factors like:
- Income
- Debts
- Credit history
- Down payment amount
Online mortgage calculators can provide estimates, but a pre-approval is key. This shows sellers you are a serious buyer and gives you a target budget when house hunting.
What fees and closing costs will I have to pay?
In addition to your down payment, you’ll pay fees and closing costs at mortgage origination. These can total 2-5% of the loan amount. Common fees include:
- Origination fee – Charged by the lender to process the loan. Often 1% of the loan amount.
- Appraisal fee – For the appraisal on the home’s value. Typically $300-$500.
- Credit report fee – $30-$50 for your credit report.
- Title services fee – $700-$1200. Includes title search, insurance, closing services.
- Home inspection – Optional but recommended. $300-$500.
- Points – Optional. Each point equals 1% of the loan amount. Reduces interest rate.
Save up at least 3-5% of the home’s price to cover these fees so they don’t derail your purchase. Ask lenders for a full cost estimate.
How can I improve my chances of getting approved?
To boost your odds of mortgage approval:
- Pay down debts to reduce monthly obligations and credit usage
- Save for a larger down payment like 10-20%
- Avoid new credit inquiries and large purchases
- Verify income with tax returns, pay stubs, W2s
- Choose FHA or other lenient programs for lower scores
- Get pre-approved to show sellers you can get financing
- Explain credit blemishes with a letter of explanation
- Follow up on all lender requests promptly
Taking these steps demonstrates you are financially ready to take on a mortgage. Being organized and proactive will ease the process.
What documents will I need to provide?
Be prepared to provide extensive documentation to your lender such as:
- Identification like your driver’s license, passport, or social security card
- Income verification – W2s, recent pay stubs, federal tax returns
- Bank statements showing down payment funds and cash reserves
- Credit history report
- Debt-to-income ratios from monthly obligations
- List of property assets like retirement accounts, vehicles, investments
- Divorce decree or child support info (if applicable)
- Gift letter if receiving gift funds for down payment
- VA certificate of eligibility (for VA loans)
Keeping records organized in a home buying binder makes it easy to submit needed paperwork in a timely manner. Notify references they may be contacted to verify info.
How long does the mortgage process take from start to finish?
The entire mortgage process typically takes 45-60 days on average:
- 7-10 days to get pre-approved once you submit your application and documents.
- 30 days to shop for a home and make an offer once you are pre-approved.
- 30-45 days for loan underwriting and closing once your offer is accepted.
Having all your financial documents ready to submit upfront can help speed things up. Allow extra time for closing if you are purchasing a new construction home.
The loan estimate you receive outlines the entire rate lock timeline from application through closing. Communicate any timing limitations with your lender.
What are the different types of mortgage loans?
The main mortgage loan types are:
- Fixed-rate – Interest rate remains the same over the loan’s term. More predictable payments.
- Adjustable-rate (ARM) – Interest rate changes periodically. Lower initial rates but less predictable.
- FHA loan – Low down payment option insured by the FHA. Added mortgage insurance.
- VA loans – No down payment loans for veterans. Limited fees.
- USDA loans – Zero down payment loans for rural and suburban areas. Low-to-moderate income borrowers.
- Jumbo loans – For loan amounts above conforming limits. Require large down payments.
Talk to your lender about which type best fits your budget and financial goals. Fixed-rate loans are ideal for stability while ARMs offer lower initial costs.
What are mortgage rates and how do they work?
Mortgage interest rates average 3-5% currently but vary daily based on:
- The federal funds rate
- Bond market yields
- Lender competition
Rates are higher for lower credit scores and larger loans. Getting multiple rate quotes lets you compare options. Locking your rate early can protect you from increases later.
Points allow you to pay more upfront to buy down your interest rate. Each point equals 1% of the loan amount. Paying 2 points on a $200,000 mortgage would lower your rate by about 0.25%.
Key Takeaways
- Shop for lenders and get pre-approved before house hunting
- Improve your credit score to the 700s to qualify for better rates
- Save for at least a 10% down payment if possible
- Ask lenders to explain all fees so no surprises crop up
- Get rate quotes from multiple lenders to find the best deal
- Complete paperwork promptly to keep the process moving
- Be ready to provide extensive financial documentation
- Allow 45-60 days minimum for the entire mortgage process
Conclusion
- Research mortgage programs like FHA and VA loans to find the best fit based on your finances
- Get pre-approved to demonstrate to sellers you can obtain financing
- Be organized with all required paperwork to speed up the process
- Pay down debts, increase savings to improve your loan eligibility
- Ask your lender tons of questions and understand the costs before committing
- Manage the stressful process by planning ahead and tracking all deadlines
FAQ
Q: What is private mortgage insurance (PMI) and when is it required?
A: PMI is an added insurance premium charged if you put less than 20% down on a conventional loan. It protects the lender in case you default. PMI is usually 0.5% – 1% of the loan amount per year until you build 20% home equity and can cancel it.
Q: Does getting pre-approved obligate me to use that lender?
A: No, pre-approval does not lock you in. Shop around with other lenders once you start house hunting. Let your pre-approval lender know you are doing so they can try to offer the best deal.
Q: Does my credit score need to stay the same until closing?
A: You need to maintain relatively the same credit profile from pre-approval through closing. Don’t open new credit cards or take on new debts. A major drop in your score could lead to denial.
Q: What debt-to-income ratio do lenders look for?
A: Many lenders want your total monthly debt payments to be below 36% of gross monthly income and housing expenses specifically to be below 28%. The lower the better for approval odds.
Q: Can I lock in a mortgage rate before finding a house?
A: Yes, rate locks allow you to lock in a current rate for 30-90 days so it doesn’t go up before you find a home. There is sometimes a small fee for this option.
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