When purchasing a house, it is common to have questions. And that probably doubles when it is your first mortgage. This guide answers many of those inquiries and provides tips for first-time homebuyers preparing for the mortgage process.

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What Is a Mortgage?

A mortgage is a loan used to purchase real estate, such as land or a home. Borrowers agree to repay the lender in principal and interest through a series of payments. 

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The property itself serves as collateral – meaning if the borrower defaults, the lender can foreclose the home. Mortgages are often long-term, with standard repayments lasting 15 or 30 years.

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To apply for a mortgage, candidates must meet several requirements, such as minimum credit score, down payment, and debt-to-income (DTI) ratio. Mortgage applications then go through an underwriting process before reaching the closing stage. Assorted mortgages are available depending on the borrower's needs and budget.

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The Types of Mortgages for First-Time Home Buyers

Several mortgage loans and programs are available to first-time home buyers. Each has unique qualifications and conditions, along with benefits and drawbacks. Knowing all the options is essential to finding the one that suits your situation.

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Following is an overview of the options for your first home purchase.

What are the benefits of a fixed-rate mortgage?

A fixed-rate mortgage is a loan in which the interest rate remains the same throughout the term of the loan, as opposed to loans in which the interest rate may adjust or "float." The benefit of a fixed-rate mortgage is that the payments will not change until you pay it off. That can help you budget better and give you peace of mind. 

What are the benefits of an adjustable-rate mortgage?

In an adjustable-rate mortgage (ARM), the interest rate changes in relation to the market index rate. That can be beneficial because the payments can go down if interest rates fall--saving money and making it easier to qualify for the loan in the first place. An ARM can have the opposite effect if interest rates go up.

What are the mortgage loans available, and what are their pros and cons?

Several mortgages are available to first-time home buyers, each with an upside and downside. Some of the most popular options include:

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• Conventional loans: The most common mortgage offered by banks and lenders. Borrowers benefit from flexible, conforming loan terms but must meet eligibility requirements.
• Jumbo loans: Those buying more expensive properties may have higher loan limits than a non-conforming loan but also higher interest rates and closing costs.  
• Government-backed loans: Mortgages insured by federal agencies such as the FHA, USDA, or VA aid borrowers with low credit scores and minimal down payments. Alas, higher interest rates and insurance surcharges are a drawback.

The Various First-Time Home Buyer Mortgage Programs

Below are examples of available programs offered by various lenders:

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• Fannie Mae and Freddie Mac loans: Conventional loans insured by the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation allow borrowers to qualify for as low as a three percent down payment. 
• FHA loans: Backed by the Federal Housing Administration, the eligibility requirements, such as only a 580 credit score and a 3.5 percent down payment, make them ideal for first-time home buyers.
• USDA loans: The United States Department of Agriculture Rural Development offers guaranteed housing loan programs for financing rural properties with zero percent down. 
• VA loans: Active and former military personnel may qualify for no-down-payment loans through the U.S. Department of Veteran Affairs.
• Home renovation loans: A fixer-upper allows home buyers to purchase and remodel a home within the same loan.
• State-wide first-time home buyer programs: Each state offers programs that provide tailor-made aid and assistance to first-time homeowners. 

A Timeline of the Mortgage Process for First-Time Home Buyers

Buying a home is considered a vital aspect of the American dream. As a first-time buyer, it can feel daunting. Below is a timeline of what to expect when purchasing your first home.

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Step 1: Obtain Pre-Approval from a Lender

After comparing different lenders and loan types, getting pre-approved is the first step. A mortgage pre-approval includes setting the initial loan terms, such as how much you are eligible to borrow. A pre-approval letter gives potential sellers a glimpse of your financial standing, so they know you can afford the asking price. 

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During the process, lenders analyze a borrower's credit score, employment history, income, and debt obligations. Ensure your information meets the standard qualifications before seeking pre-approval.

Step 2: Hire a Real Estate Agent 

While a real estate agent is not required to purchase a home, they can make the process more manageable. These agents are experts within local housing markets who assist buyers in finding a suitable home and negotiating the price on their behalf. Sellers are responsible for covering their commission, so hiring a realtor comes at no cost to the buyer. 

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Inquire with friends and family for recommendations, or search online for agents. Screen multiple candidates to ensure the chosen individual has a solid track record and exemplary references. 

Step 3: Search for a Home Within Budget 

House shopping is the fun part, but it is not always agreeable. A real estate agent will schedule showings and tours for homes that may be of interest. To steer these references in the proper direction, consider factors such as the preferred size and layout, what neighborhood you want (i.e., school districts and amenities), and your budget. 

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Decide the highest you are willing to pay in the event of a bidding war, and only make offers within these limits. 

Step 4: Make an Offer 

When you find the perfect home, it is time to put that offer in. That is where having a real estate agent can also be helpful. They assist in offering an initial bid that impresses the seller and addresses negotiations amidst counteroffers. 

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The buyer and seller will prepare for the mortgage closing steps if an offer is accepted. Remain patient, as initial proposals are not always accepted, and negotiations can get extended sometimes. 

Step 5: Get a Home Inspection and Appraisal

Buyers often include contingencies. Examples include requiring both a home inspection and an appraisal. Such contingencies protect buyers, but they can be waived in some circumstances.

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A licensed real estate inspector is recommended as they can distinguish if the home has concerns prior to purchasing. However, lenders often mandate appraisals to determine the property's fair market value to ensure the buyer does not overpay. 

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Step 6: Save for Closing Costs

Once the seller accepts an offer and the lender reviews the application, buyers receive their loan estimates. That includes detailed assessments of the terms, mortgage rates, and the expected payment at closing. Buyers pay between two and five percent of their home purchase in closing costs, not including the down payment.

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Since closing costs can often be burdensome for first-time homebuyers, consider assistance programs offered by a state's housing finance agency or third-party housing organizations. 

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Step 7: Purchase Homeowners Insurance 

Another step before closing is acquiring insurance coverage. That includes homeowners insurance, which protects your home from hazardous conditions, and title insurance, which prevents others from claiming the title.

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Lenders mandate that borrowers have homeowners insurance, including specific coverage requirements. Yet, these costs, in addition to others like property taxes, often get overlooked. Obtain quotes from multiple providers to find one that suits your needs and budget.

Step 8: Close On the Mortgage

Closing day is the last step to becoming a homeowner. Once everything clears with the seller and underwriting is complete, the property deed can transfer. Three essential steps must be completed during closing for that to transpire. That includes reviewing and signing the loan documentation, paying the closing costs and down payment, and then collecting the keys to your new home. 

Step 9: Move Into Your New Home

The big day has arrived. Alas, moving can be exciting and stressful, so make a plan. Factors worth considering are the distance, available time, labor, and budget. 

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To make a move simpler, get rid of things you no longer want, stay organized while packing, and hire professional movers. After the move, share the new address with family, friends, banks, service providers, and the post office. 

Step 10: Make the First Mortgage Payment

You have closed on the home and made the move, so it is time to get settled. However, homeownership costs do not end at closing costs and down payment. Maintenance, insurance, and a monthly mortgage are often the norm.

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Most first mortgage payments are due on the first day of the month after closing. After that, payment is due on the first of each month.

Frequently Asked Questions by First-Time Homebuyers

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What Is the Difference Between a Pre-Qualified Mortgage and a Pre-Approved Mortgage?

​When shopping for a new home, you may hear the terms "pre-qualified" and "pre-approved" used interchangeably. However, there is a difference. 

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A pre-qualified mortgage is based on information provided to the lender about the borrower’s income, employment, and debts. It is an estimate of how much a homebuyer can afford to borrow. It is not required but is often utilized when approaching different lenders.

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On the other hand, pre-approval is required for a home loan and is based on a thorough analysis of one’s financial history. Lenders examine a borrower’s credit score, employment, and income to determine how much they can borrow. The process can take longer, from a few days to weeks.

What to Do if Your Mortgage is Denied as a First-Time Home Buyer

The average home price for first-time buyers is $300,000, with the typical loan being $288,000. Lenders denying mortgages is inevitable sometimes. 

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There are a few things to do if your loan gets refused. First, ask the lender if there is something you can do to improve your chances. If it is credit-related, lenders must provide a reason for the denial and from which credit reporting agency the flagged information came. 

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Consider other creditors as well. Compare the rates and fees. For instance, some might charge origination fees, while others might not. One last recourse is government-backed loans, which may have less strenuous terms and conditions.  

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What to Do if You Can't Afford Your Mortgage Payment as a First-Time Home Buyer

It's essential to afford your mortgage. The average monthly payment for first-time home buyers is $1,400, but several alternatives are available to ease this financial burden. 

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One option is to refinance. That means getting a new loan with a lower interest rate, saving you money. Other options include taking out a home equity loan for extra cash, getting a part-time job, or selling the property. 

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Homeownership is vital, so weigh all options before making a choice. If you decide to refinance or sell, ensure you get the best possible deal. 

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What to Expect During the Mortgage Underwriting Process as a First-Time Home Buyer

The mortgage underwriting process can be intimidating. Following is a rundown of what these procedures entail.

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Step one of the underwriting process is getting pre-approved. That includes credit, income, and asset verification based on the borrower's financial records and statements. Next, the loan officer will conduct a home appraisal, inspection, title search, and issuing of title insurance. After all these aspects are reviewed, an underwriting decision of approval or denial gets made. 

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How long it takes to underwrite a mortgage loan depends on a few factors, such as if the underwriter requires additional information, how busy the lender is, and how streamlined their practices are. The quicker the financier's requests get a response, the quicker this process. However, underwriting is just one part of the lending process that can take up to 40-50 days to complete.

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How to Shop for the Best Mortgage Rate as a First-Time Home Buyer

The average interest rate for first-time home buyers is 4.375%. To receive a better mortgage rate, below are a few tips. 

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First, improve your credit standing before applying. Doing so gives you more bargaining power. Next, browse for multiple lenders and compare their rates. There are numerous creditors, so find the one that suits you best. Last is to negotiate for a lower rate with the selected lender. Ensure the rate will not cause the mortgage to exceed your budget.

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Closing Thoughts

Congratulations, with this guide, you are now informed about how to become a homeowner. While the mortgage process can seem harrowing, especially the first time, buying a home can be easy with help and preparation. For more information, contact a Wesley Mortgage representative today.

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Click Here To Connect With Wesley Mortgage And Begin Your Mortgage Journey Today

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