The First-Time Homebuyer’s Guide to Mortgages
Obtaining a mortgage can be a daunting prospect when you’re a first-time homebuyer. Borrowing money is always stressful, and the confusing financial terminology doesn’t help matters any. We advise you to plan carefully and not go in blind – you’re about to be locked into a repayment plan for many years to come. Without careful planning, you may drop the ball on important details or end up paying thousands more than you should.
To make it easier for you, KilGO Insurance has put together this first-time homebuyer’s guide to mortgages. We cover everything you should know about these loans, from important terminology to the closing process, and everything in between.
Mortgage 101: Critical concepts to know
Before you apply for a mortgage, understand how they work.
- The principal: The principal is the amount of money you are going to receive from the lender.
- Mortgage interest rate: The mortgage rate is the interest the lender charges on the principal.
- Mortgage APR: The Annual Percentage Rate (APR) is different from the interest rate. It covers the whole cost of the mortgage you’ll be paying for – including the interest, closing costs, and associated mortgage fees.
- LTV ratio: The loan-to-value (LTV) ratio is important to the lender, allowing them to pinpoint the risk they will take when offering you a loan – lower is better, says the Balance.
- Debt-to-income ratio: The debt-to-income ratio is also important to the lender. Anything below 35 percent is golden, usually. Lenders usually won’t consider anything over 43 percent, according to the NerdWallet.
- The collateral: The collateral is something of value you place down against the borrowed amount, acting as a safeguard for the seller. For mortgages, the collateral is your home.
Types of mortgages
Not all mortgages are equal. Find and pick one that suits you best.
- Conventional mortgages: A conventional mortgage is not insured by the government. It can be a conforming loan – within the limit set by the Federal Housing Finance Agency – or a
- Jumbo: A “Jumbo” loan is the most popular type of non-conforming loan. It’s common in high-cost areas where houses fall outside the mortgage ceiling (the threshold is $548, 250 for single-family homes in 2021).
- Government-insured: Government-insured loans (like FHA, USDA, and VA) have less stringent requirements than conventional mortgages.
- Adjustable-rate: Adjustable-rate loans have changing interest rates, depending on market conditions.
- Fixed-rate: Fixed-rate mortgages have the same interest rate over the lifetime of the repayment period.
Here is a financial services site that covers the mortgage types mentioned above in detail (if you’re stuck or having trouble picking a mortgage). You can also access relevant educational resources, including a glossary of important financial terms, making it a handy reference source.
Before obtaining a mortgage – Recommendations
Avoid biting off more than you can chew by learning more about what you’re getting into.
- Evaluate your financial condition: A mortgage is a serious financial commitment. You need a solid credit score to secure one, not to mention a spending plan afterward to meet your daily living expenses and still pay back the borrowed amount.
- Don’t fall for cheap tricks: There are scams aplenty – like credit counseling and credit consolidation agencies and fraudulent lenders. Always double-check everything before signing any paperwork. Shop around to explore your options.
- Don’t do it alone: Every community has some counseling agencies and organizations offering help with mortgages – often for free. Contact reputable ones for help with your credit score and to clarify your financial position. With their assistance, you may be able to find government-sponsored help with the down payment and/or closing costs.
The mortgage process
Once you have an overview of your financial position, you are ready to house hunt and secure a mortgage. Below is how the process works, typically (the timeline and process may differ from lender to lender):
- Consider getting pre-approved before you search for a home
Pre-approvals for mortgages are easy to secure and very useful – they give you an estimate of the amount you’re able to borrow. If you have an estimate, you know what homes you can afford and what’s outside your budget. Furthermore, you’ll have an easier time approaching real estate agents (and sellers) with a pre-approval letter in hand.
- Submit a mortgage application with a lender of your choice
Once you have found a home you want to buy, it’s time to submit your mortgage application. You will be asked to fill a form and provide some documents – such as your paycheck stubs, W-2 forms, and bank account statements. A loan officer will help you with this step. You may also be asked to purchase homeowner’s insurance.
- Receive a pre-approval letter
Once the paperwork is filed successfully, the lender will review your application and agree to give you a loan for a specific amount, provided certain conditions are met. The conditions and costs will be outlined in a pre-approval letter for you to review. (You can still back out at this stage).
- The lender will make some checks
Your lender may reach out, asking for additional information. Be sure to oblige to keep your application moving forward. The lender will order a home appraisal at this stage to confirm the market price of the home you’re about to purchase. They will also review your credit score, so make sure you don’t take on additional loans (or do anything drastic financially) to maximize your chances of securing the mortgage.
- Receive (and review) the documents outlining the costs associated with mortgage
The lender will approve your loan. You will receive some important documents from the lender at this stage: a letter of commitment, the closing disclosure, and the loan estimate. Review all the documents carefully (with help from a counselor, if necessary).
- The closing – the final step to purchasing your home
The closing is where you’ll sign off on the mortgage and receive the keys to your new home. Some paperwork you will have to sign and review at the closing meeting includes the mortgage note, the mortgage or trust deed, the deed (of property), and affidavits and declarations (as applicable). Review everything carefully before you sign, and don’t hesitate to ask questions.
Once all the paperwork is completed successfully, the lender will transfer money to the homeowner (seller) on your behalf.
After obtaining the mortgage
Paying back your mortgage requires careful planning
- Have a payment plan: You will have to pay an agreed-upon amount every month. Failure to pay on time can result in late fees and the lowering of your credit score – so make sure you make a budget and stick to it.
- Plan for emergencies: Emergencies like job loss, illness, and natural disasters may happen. As such, it may be a good idea to start an emergency fund.
- Avoid foreclosures: Foreclosures happen if you fail to consistently make payments (your lender will take the house). To prevent foreclosures, keep your credit score high, ask for help from a financial planner, and work with your lender (if necessary).
As you can see, the mortgaging process can be long-drawn-out and often overwhelming. Fortunately, you don’t have to go it alone – there are professionals out there who can guide you through the whole process. You can also turn to community non-profit organizations that offer financial advice and literacy. Last, but not least, talk to your friends and family – they have likely obtained a mortgage before, and should be happy to help.