Homebuying advice: First-time homebuyers

The thought of purchasing your first home is exciting — and a little intimidating. Even when you’re feeling ready to jump into the mortgaging process, it can be hard to know where to start. From choosing a mortgage loan type and finding the right lender to house hunting and saving, there’s a lot for first-time homebuyers to consider as they start their journey to becoming homeowners.

Whether you’re worried about meeting borrower eligibility requirements, not sure which mortgage option is right for you, or interested in learning the steps for buying a house for the first time. We’ve got you covered. In this guide, we’ll give you an overview of all the advice a first-time buyer needs to know before you dive into your own homebuying adventure.

The mortgage process at a glance

There are six main steps of the mortgage process: pre-approval, house hunting, loan application, loan processing, underwriting, and closing. Apart from pre-approval, another great place to start is understanding the different mortgage options available and what it takes to qualify for one. You’ll have a variety of home loans to choose from, and each has their own down payment and eligibility requirements. As a first-time borrower, there are two main categories your loan will typically fall under:

1. Conventional mortgages: Any mortgage that isn’t guaranteed by the government falls under the conventional loan umbrella. You’ll have the option to choose a conforming loan which has the maximum loan limit range between $832,750 and $1,249,125 depending on your location.  Or you may opt for a non-conforming loan, commonly referred to as a jumbo loan, which is any loan amount that surpasses the conforming loan limits.
2. Government-backed loans: These are loans that are insured/guaranteed by government administrations whose goal is to provide borrowers with lower down payment options to make homeownership a reality for more people. Only approved lenders are able to provide these options to borrowers. Each type of government-backed loan has their own rules and eligibility requirements:

• FHA loans are insured by the Federal Housing Administration. The minimum down payment requirement is as low as 3.5%, making them an attractive option for first-time buyers and families with low to moderate incomes.
• VA loans are guaranteed by the Department of Veterans Affairs. They are only available for veterans, service members, and surviving spouses, as well as current or former National Guard members, who meet the VA’s qualifications. There is no down payment required, just a one-time VA funding fee.
• USDA loans are insured by the U.S. Department of Agriculture and are available to suburban and rural homebuyers.

The number of mortgages to choose from may feel overwhelming, but the good news is that your lender will be able to help you determine which option is right for your situation. That’s why it is so important to take your time researching and contacting potential lenders before deciding on one to fund your mortgage loan. For instance, not all lenders are approved to provide FHA or VA loans, so you may have to cross them off your list if you’re interested in applying for one.

Shopping for a mortgage lender takes time and careful consideration, and there’s more to it than looking at their rates. Customer reviews, referrals, and their list of mortgage products can help you narrow down your search.

Once you have your top lenders in mind, you can submit your pre-qualification application. Generally, lenders won’t conduct hard pulls on your credit for pre-qualification, so it’s okay to apply to multiple lenders at this stage so you can compare different estimates. (Though some lenders may require you to pay application fees.) Lenders will review your credit score, self-disclosed income, and expenses in order to provide an estimate of how much you could be eligible to borrow. Pre-qualifying gives you a good indication of your ability to be fully approved and can help you understand how much home you can afford.

The next step in the mortgage process is obtaining pre-approval status. Mortgage pre-approval is an in-depth verification of the information you provided when you applied for pre-qualification. At this point, you’ll know which lender you want to work with and they will take into account everything from employment history to debt-to-income ratio (DTI) and more. Pre-approval does take longer to achieve, but it will give you a clear idea of the interest rate and mortgage amount you qualify for. It’s not a guarantee of approval, but having a pre-approval letter in hand lets sellers know you are a serious buyer.

Homebuying costs and how to prepare

One concern for many people buying a home for the first time is the costs associated with purchasing a house. All mortgages come with closing costs and fees for the various services it takes to close the loan. The down payment, origination fees, appraisal fees, title searches, title insurance, and escrow deposits are just a few examples of the fees included. The goal of these costs is to ensure a seamless transition of property ownership.

While your required down payment for a home can range from 0% to 20% depending on the mortgage you choose, typical closing costs will be from 2% to 6% of the total loan amount. This is why it’s important to get pre-approved — that way, you’ll have a better understanding of your loan costs and be able to create a budget/savings goal. Here are a few strategies you can implement now:

• Improve your credit score so you’re able to qualify for the best possible interest rate and loan terms, saving you more money in the long run.
• Track your income and bills and look for ways to reduce your spending/expenses.
• Create a budget and stick to it!

You can’t avoid them entirely but, some closing costs and fees may be negotiable, either with your lender or covered by the seller. However, it’s always best to be prepared with enough savings for your up-front costs.

Finding a home

Shopping for a home is thrilling, but it can also be stressful if you’re doing it alone. A knowledgeable real estate agent can be a huge asset during the house-hunting process. Their experience, market knowledge, and connections are invaluable for finding you the right home. Once you have a solid list of your needs and wants in a home, plus the location you want to search in, your agent should be able to produce a list of homes worth visiting in person.

You can also utilize a number of different apps to assist you in your search. Zillow, Redfin, and Trulia are great resources for finding a wide variety of homes and locations.

It's important to take your time defining your new home needs. What are your non-negotiables? How many beds and baths do you need? How far are you willing to commute to work? Once you know your limitations, geographic radius, and other home requirements, your search will become a lot easier.

What do you need to get a mortgage loan?

Every buyer’s path to homeownership is unique, but the documents you’ll need on closing day will look similar regardless of your mortgage type. Here’s a list of what you’ll often need to have on hand, or be required to get, during the mortgage approval process:

• Government-issued ID
• Down payment
• Bank statements from the last two months
• Pay stubs from the last 30 days
• Tax returns – business and personal – from the last two years
• W-2s or 1099s for the past two years
• Retirement statements from the last two to three months (if applicable)
• Social security award letter (if applicable)
• Property appraisal
• House contract
• Inspection documentation
• Title insurance evidence
• Property hazard insurance

Your lender will be by your side to help you through every step of the mortgage process, but the key to success is staying organized. Be sure to review all of your options with a trusted lending partner to be sure you are getting the most favorable terms and deal available.