How to Get a Mortgage for the First Time

first-time home buyer

Ready to buy a house?

Most of us don’t have hundreds of thousands of dollars lying around for a home purchase. In order to get your dream home, you need to convince someone to give you the money you need — in other words, you need a mortgage.

When I bought my first (and hopefully only) house, I had no idea how involved the mortgage process would be. As a first-time home buyer, the whole thing can be overwhelming.

Before you embark on your own home-buying journey, here’s what you need to know about getting a mortgage for the first time.

Your credit matters — a lot

Before you start looking for a mortgage, check your credit. Lenders put great stock in your credit score, and your credit is seen as your financial reputation.

When someone is handing over hundreds of thousands of dollars to help you buy a house, they want to know you will make your payments on time.

Find your score

In order to get a conventional mortgage, most lenders like to see that you have at least a 620 credit score. If you want the best possible interest rate on your mortgage, you probably need a credit score of 720 or higher.

Check to see if one of your credit card issuers offers free access to your score. You can also view your score with a consumer credit site like Credit Karma or Credit Sesame, or you can pay for your credit scores on FICO’s site to get it right from the source.

If you don’t have good credit, or if your credit file is too thin for FICO to issue you a score, take steps to improve your score.

Alternative credit reporting can help you get on the right track, and even help you get a mortgage in a pinch. If you have poor credit, take steps to make your bill payments on time and reduce your debt.

Check your report

You should also review your credit report for errors. Learn what should and shouldn’t be on your credit report, and dispute any problems you see ahead of time.

When my then-husband and I applied for a mortgage in 2007, one of his credit cards and three of his student loans were double-reported. It made it look like our household had much more debt than we did. We needed our credit report updated with correct information before proceeding.

The number one thing you should do as a first-time home buyer is to check your credit. Know where you stand, figure out where to improve, and get to work. Depending on your situation, it can take anywhere from three to 12 months to improve your credit.

Don’t assume that you’re in the clear just because you’re approved for a mortgage. Many lenders pull your credit again between the time you and the seller agree on the purchase and the time you actually close.

If something changes, your whole purchase could be derailed. Don’t do anything to rock the boat, whether it’s applying for a new loan or making purchases on a credit card.

Lenders need a ton of documentation

When getting a mortgage, prepare to provide a lot of documentation.

The Consumer Financial Protection Bureau requires that lenders verify your ability to repay a mortgage. This means that you need to provide documentation showing that you can afford your mortgage.

Some of the documents you need when getting a mortgage include:

  • Identification (driver’s license, passport, Social Security number, address, etc.)
  • Bank statements
  • Paystubs
  • Investment statements
  • Tax returns
  • Information about your debts
  • Other documentation of your financial situation

Lenders need to see that you have money coming in, and they want to know that your financial habits (as shown on your bank statements) are conducive to paying your debts.

Your information will also be reviewed to see if there are unusual deposits to your account. Any large deposits need to be explained and traced to their origin.

If you receive help making a down payment, lenders need a letter verifying that it is a gift. You aren’t allowed to get help as a loan, and you usually need to show that the gift is from a close relative.

Extra hoops for the self-employed

Self-employed home buyers can expect to jump through extra hoops. Gone are the days of the easy-to-get stated income mortgage. Your lender might require you to go through an income audit and provide other documentation to prove that you can make your payments and afford your home.

Before you apply for a mortgage, make sure you gather what documentation you can. Speak to a mortgage professional to find out what you might be missing.

It’s important to start gathering your documentation as early as possible. You don’t want your closing derailed because you’re missing an essential piece of documentation.

Get pre-approval on a mortgage

Before you start house hunting, get pre-approval on a mortgage. This process involves a credit check and a limited documentation check. The lender tells you how much they’re willing to let you borrow, and your pre-approval can be used as “proof” to show sellers that you’re serious.

On top of that, a pre-approval might also “lock in” a mortgage rate. If you buy within a set period of time, you’re guaranteed a specific rate.

When you talk to the lender, make sure you have a pre-approval that keeps the rate on your home loan from going higher, but allows you to take advantage if mortgage rates drop.

Realize that pre-qualification is different from pre-approval. With pre-qualification, the lender offers an estimate of what might be possible, based on the information you provide. Pre-approval is a more involved process that involves more verification.

Pre-approval isn’t a slam dunk, though. The situation can still change if something new comes to light in your documentation.

However, it helps to get pre-approval so that you have a better idea of your budget and you have better bargaining power when you’re ready to make an offer on a house.

Know your mortgage options

You might be surprised at the number of mortgage options available for a first-time home buyer. Understanding the different programs available can help you choose the right mortgage for you.

Some of the best choices for a first-time home buyer include:

Conventional loan

This is a “regular” loan offered by lenders, without any sort of insurance help from the federal government.

In some cases, it’s possible to get a loan without a down payment, although those have been few and far between since 2008. You can expect to put between 5 and 20 percent down. You also usually need a credit score of at least 620 to be considered.

FHA loan

The Federal Housing Administration loan program features a low down payment requirement and easy credit qualifying. The government offers to insure the loan and reduce the risk to the lender.

You can pay as little as 3.5 percent down and qualify with a credit score as low as 580. It’s possible to get an FHA loan with a score below 580, but you might need a larger down payment.

USDA loan

If you’re willing to live in a rural area, you can use the Single Family Housing Guaranteed Loan program to help you get a mortgage with zero down.

The government doesn’t issue the loan, but it does help the lender reduce its risk. There are income eligibility and credit requirements to meet.

VA loan

Service members, veterans, and eligible surviving spouses can take advantage of the VA home loan program. You don’t need a down payment, and the loan rates are competitive. You might need to meet creditworthiness requirements, based on the lender.

Local and state first-time home buyer programs

Depending on where you live, there might be special programs in your state or town designed to help you get your first mortgage. Ask a mortgage broker to help you determine which programs might be right for you.

Eligibility requirements vary, but a good broker can help you apply for available programs.

Sweat equity programs

Many areas offer sweat equity programs designed to help you afford your first home. If you’re willing to help build the home or build other homes, you can get help making a down payment or qualifying for a mortgage.

Use a mortgage broker

A mortgage broker can help you choose from various programs and provide you with information about what’s available in your area.

When I was home shopping, my mortgage broker’s knowledge was valuable in helping me settle on an FHA loan as the best option for my finances and situation. Choose someone with knowledge of the programs available in your area.

Don’t forget to look online for mortgage brokers. Today, it’s possible to access a variety of quotes from several lenders and brokers just by filling out a single form.

What about the down payment?

For best results, you need a down payment. Your down payment reduces the size of your mortgage. If you buy a $200,000 home, a 20 percent down payment is $20,000, leaving you to borrow $180,000.

When you put down 20 percent, you’re more likely to convince a lender to give you a break on your interest rate. But, more importantly, 20 percent down can change how much you pay over time.

You can save almost $100 per month on your payment, and save about $34,000 in interest if you borrow $180,000 instead of $200,000.

You can buy a home without paying 20 percent down, but it comes with additional costs. Even if your credit qualifies you for the best possible interest rate, a smaller down payment will impact your bottom line: If you put less than 20 percent down, you’re required to pay mortgage insurance.

Mortgage insurance protects the lender in the event that you default on your mortgage. You’re expected to bear the cost of mortgage insurance; it’s usually added to your monthly payment.

Private mortgage insurance usually costs between 0.5 percent and 1.0 percent of the entire loan on an annual basis. On a $200,000 loan, that’s $2,000 a year, or about $167 per month.

If you get an FHA loan, you still need to pay mortgage insurance. It’s not private mortgage insurance, but it’s still required and should be factored into the cost of the loan.

After you build enough equity, mortgage insurance premiums are removed, whether you have private mortgage insurance or whether you have an FHA loan.

Buying for investment purposes

If you’re interested in purchasing a home for investment purposes, it’s still possible to use your first mortgage. You can buy a home with the intention to rent it out, even though you might live in a rental.

One strategy is to get an FHA loan on a duplex or fourplex. You’re required to live in the property for at least a year, but you can live in one unit and rent out the others.

Someone else pays rent when you buy for investment purposes. With an FHA loan (and its low down payment), you can get a place to live and get started in real estate investing.

Before you make this move, review the rental market in your area. Make sure that, at the very least, the amount you receive in rent will offset your mortgage payment and other costs.

Final words

Buying a home is a big step. It’s a huge responsibility, and you need to make sure you’re ready. Part of being prepared is understanding how to get a mortgage. Get your credit in order, gather your documentation, and get pre-approval.

Get out there and find the house of your dreams.

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Published in Buying a House, Mortgage