If you look at all the home sales from last year, you’ll find that 33% were for first-time homebuyers. Most first-time homebuyers feel nervous about buying a house, primarily because they don’t know what to expect.
When you buy your first home, you’ll have to get your first home mortgage. While the home-loan process is somewhat lengthy and time-consuming, it’s not a complicated process.
Many first-time homebuyers feel nervous about this process, but there’s no reason to feel this way. If you are a first-time homebuyer, you can follow this guide to learn everything you need to know about getting your first mortgage.
Lenders Have Eligibility Requirements
One of the top things to know as a first-time homebuyer is the eligibility requirements that lenders have for home loans. Understanding what lenders look for with applicants can help you prepare yourself for your first loan.
Here are the top factors that affect a lender’s decision when evaluating a home loan application:
Your credit score affects your ability to get a loan, and it also plays a role in the mortgage programs you can use. Credit bureaus calculate scores by factoring in many factors.
While 850 is the best score you can have, you won’t need a score this high to get a loan. You’ll face fewer challenges getting approved if you have a score of 680 or higher, though.
Down Payment Amount
First-time homebuyers should also know that lenders factor in the down payment amount a person can provide. You can buy a home without a lot of money down, but you will have more options if you have around 20% of the home’s purchase price.
As you prepare to get a loan, you will benefit by understanding the debt-to-income (DTI) ratio. This ratio is the most commonly used ratio by lenders when evaluating loan applications.
The DTI tells a lender where you stand financially, in terms of your debt and income, and it tells them how much money you can afford to borrow for your first home loan.
Preparing for your first time home buying experience also requires having a job. Most lenders want to see a history of at least two years with the same job when reviewing applications.
You Can Choose the Best Mortgage Program for Your Situation
Understanding the basic eligibility requirements is essential, as they tell you if you qualify for a first home loan or not. Still, it’s also critical to understand that there are different loan programs. Each loan program has different standards.
In terms of home mortgages, you can apply for an FHA loan, VA loan, or conventional loan. There are others, too. Your financial situation might qualify you for every loan program or just one or two.
As a result, it’s essential to speak to a home loan lender when buying your first home. They can review all your information to determine which program to recommend.
For example, if you don’t have a lot of money for your down payment, they might recommend an FHA loan. If you have a high credit score and 20% to put down, they might recommend a conventional loan.
The primary thing to know is that you can compare many loan programs to find one that suits your needs and that fits your financial state. If you qualify for several types, you can choose the one with the most favorable terms.
Understanding Some Key Terms Is Crucial
Next, it will help to understand some key mortgage terms. When you apply for your first mortgage, you might have questions about how they work. Understanding several common terms can help answer your questions.
Here are several terms you might hear as you begin looking for your first home loan:
One term you will hear when talking about mortgages is escrow. Escrow refers to an account that your lender sets up to hold your money. For example, when you put money down with an offer, the money goes into an escrow account.
When you get a loan, the lender might require setting up an escrow account for your property taxes and home insurance. If so, you’ll pay a portion of these expenses monthly. Your lender holds the funds and pays the bills as they come due.
Fixed-Rate vs. Adjustable-Rate
Lenders might also talk to you about the type of interest rate you will have with your loan. The two primary types are fixed-rates and adjustable-rates.
As the name implies, an adjustable-rate has an interest rate that changes. A loan with a fixed-rate has an interest rate that never changes.
PMI stands for private mortgage insurance, which is a fee you must pay with some loan programs. The main time you pay PMI is if you put less than 20% down when using a conventional loan.
Underwriting is another term your lender might talk about as you work on getting a mortgage. Every loan goes to the underwriting department before closing on a house purchase.
This department verifies everything about the loan before closing, and you can’t close on your new house until underwriting approves your loan. This process often takes anywhere from a few days to several weeks.
Finally, you’ll hear the term “closing costs” when talking to a lender. Closing costs refer to the fees you must pay to close on your home loan. These costs include a loan origination fee, inspection costs, and title work fees.
Your lender can give you a statement before closing that lists all the closing costs you must pay. You can even request this statement before choosing a lender to use to compare lender fees.
How to Get a Free Quote for Your First Home Mortgage
Getting your first home mortgage shouldn’t scare you, as it’s not as hard as you might think. It might take some work to prepare for it, but it will be worth it once you receive your preapproval.
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