First Time Home Buyer Resources: Your Ultimate Financial Home Buying Guide

The Basics of a Mortgage

First things first, let's walk through the mortgage process with some basic definitions of terms you'll hear throughout the process.

Mortgage — In a nutshell, a mortgage is a loan that enables you to cover the cost of buying a home. Most people do not have hundreds of thousands of dollars sitting in their bank accounts, ready and waiting to be spent. A mortgage loan fronts you the money so you can purchase real estate.

You pay back your loan via monthly payments that last over the course of years or decades. The amount of time is known as your mortgage term. The two most common terms are 15 years and 30 years. A 15-year term will come with higher monthly payments, but will save you money in the long run with less interest added to the loan.

Getting preapproval for a mortgage is an in-depth process where a lender will check your credit report, credit score, debt-to-income ratio, loan-to-value ratio, and other aspects of your financial profile. This process helps you know the maximum purchase price you can afford and it provides a preapproval letter. Having a preapproval letter shows home sellers and Realtors® that you are a serious buyer. This can give you an edge over other interested home buyers who haven't taken this step.

When to Get a Mortgage

The best time to shop for a mortgage is actually before you start house hunting. Making a mortgage your first step in this process will ensure you understand how much house you can afford.

How to Get a Mortgage

Loan mortgage lenders are typically looking at a few important things to determine whether or not they will give you any loan amount. Here is the process of where to go and what to do to receive the loan you need.

Where to Get a Mortgage

There are several places first time buyers can go for a mortgage. Here are three suggestions.

1. Banks: If you have an institution that already knows you and your finances, this may be a great option. However, banks typically have only a few loan options so it's wise to talk with your banker and then compare programs with a couple more places before making your decision.
2. Nonbank lenders: Companies like Quicken Loans and PennyMac are often willing to work with borrowers that banks avoid due to their riskier profile. If you have a poor credit history or some other mark in your financial history, you may have better luck landing a loan with nonbank lenders.
3. Mortgage brokers: A mortgage broker is a specialist who can help walk you through a much wider variety of options to find a loan that's right for you. They often work with many different lenders so they can help identity different rates and programs based on your specific situation. They are true experts!

Types of Mortgage Loans Available to You

There are a number of mortgage options that may be available you. Here's a quick breakdown of the most popular.

Fixed-rate mortgage — A fixed-rate mortgage has an interest rate that will not vary over the life of the loan. This interest rate may be slightly higher overall, but it's a good choice for buyers who like the certainty of knowing their monthly payment will never increase.

Adjustable-rate mortgage — An adjustable-rate mortgage (ARM), is also called a variable rate mortgage. This type of mortgage will start with a lower interest rate for the first few years and then the interest rate (and monthly mortgage payment) will "adjust" after a predetermined period based on market indexes. With this option, home buyers enjoy an initially lower mortgage payment. However, interest rates can rise a lot, though you may be able to refinance an ARM before the rate adjusts.

Any loan that is not backed (insured or guaranteed) by an agency of the federal government is considered a conventional loan. Conventional loans come in all shapes and sizes. Conventional loans are also ideal for borrowers with a good credit score and who can provide a larger down payment.

FHA loan — The FHA loan (known as a Federal Housing Administration loan) requires a down payment as low as 3.5%. These loans are especially great for first-time home buyers without a lot of savings for a down payment or a less than stellar credit score. These loans require you to pay for mortgage insurance.

VA loan — Available through Veterans Affairs, a VA loan is for those who have served in the United States military. A VA loan can allow a qualifying home buyer to score a mortgage with no down payment requirement, no mortgage insurance requirements, and a great mortgage rate in terms of interest. Eligibility requirements for a VA loan include service time: 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves.

USDA loan — U.S. Department of Agriculture loans (USDA loans) are designed for families in rural areas. If you qualify, the government finances 100% of the home price (translation: no down payment for you!). The mortgage rate in terms of interest may be favorable too.

What's the Relationship Between a Down Payment and Mortgage?

A down payment is a percentage of your home's purchase price that you pay upfront when you close your home loan. This amount of money does not come from a mortgage lender. In fact, many lenders look at the down payment as your investment in the home purchase.

A typical suggestion for a down payment is 20% of your total home cost. However, if this isn't a possibility, there are other options to explore.

How Your Credit Score Impacts Your Mortgage Rates

After submitting your loan application, any potential lender will run a thorough check to learn about your financial history. Your credit score is one important aspect of this process.

Did you know? Credit scores range from 300 to 850, with a minimum of 620 typically needed to receive a home loan.

Lenders will check your credit score to get a sense of your financial habits. Things like your credit card balances, savings accounts, and monthly debts come into play. If you've been on top of your game, paying your bills on time, keeping your credit card balances low, and managing your debts like a pro, lenders are more likely to see you as a reliable borrower. And that can lead to better loan terms. You might get lower interest rates and more favorable repayment plans. But, if your credit score is a bit on the meh side, it can raise some eyebrows. Lenders might think twice about giving you a mortgage or might offer you less attractive loan terms to balance the risk they perceive.

Now, let's talk about the impact of new credit and how it fits into the puzzle. Lenders aren't just interested in your credit score; they also want to know about your financial situation as a whole. When you apply for a mortgage, they take a peek at your savings accounts and monthly debts. So, if you've been going on a credit spree lately, opening up multiple credit cards or taking on new loans, it can make lenders a bit nervous. They might wonder if you can handle more debt, especially if it jacks up your monthly obligations.

On the flip side, having a healthy amount of savings and manageable monthly debt payments can work in your favor. Lenders want to see that you're financially stable and able to handle mortgage payments without losing sleep. So, take it from the certified financial planners out there: keep an eye on your credit score, manage your debts wisely, and think twice before diving into new credit endeavors. It can make all the difference when you're looking to get a home loan.

Quick Tips: What NOT To Do Before Applying for a Mortgage Loan

Avoid these red flags with your mortgage application:

• Do not buy a car
• Do not use your credit card excessively
• Do not make random large deposits
• Do not buy furniture and appliances
• Do not co-sign for another loan
• Do not change jobs

Can You Afford Monthly Mortgage Payments?

Figuring out what kind of monthly mortgage payment you can afford will require a dive into your personal finance history, including a look at your current financial resources. A loan officer can help you decide if the timing is right for you.

Other Factors and Upfront Costs to Consider

Loan application — Some lenders charge an application fee to process and submit your application. This cost will be disclosed upfront.

Home Inspection — A home inspection is an important part of the process as it helps you avoid expensive surprises like structural flaws and hidden damage in your hopeful future home. The average cost of a home inspection in Texas is $430.

Homeowners' Insurance — Some mortgages include homeowners' insurance as part of the monthly payment. Others require you to obtain and pay the premium separately.

Closing costs — Your closing costs may include attorney fees, real estate tax services, and title insurance. Closing costs typically run 2-5% of a property's sale price.

Property taxes — Though not an upfront cost, property taxes are a considerable yearly cost to consider. The typical Tarrant County homeowner pays approximately $7,500 in property taxes annually.

Extra Tips for First Time Home Buyers

• There are many grants and loans available to first time home buyers that help save money. A Realtor® will be able to give you pointers on where to look for these.
• Some workplaces offer down payment or closing cost assistance. Ask your manager or HR representative! Closing cost assistance can also come through a grant or loan.
• If you've decided to wait a few years before buying a home, working with a certified financial planner may help you reach your financial and home-owning goals faster.
• You may qualify for a mortgage credit certificate. Mortgage credit certificates are federal tax credits given by the IRS to low-income borrowers. These are typically reserved for first-time home buyers. When you receive an MCC, you can claim a deduction of up to $2,000 on the mortgage interest you paid on your home.

Ready to Buy a Home? Find a Realtor® to Start the Process!

Are you a first time buyer? Having served the Fort Worth community since 1918, our Realtors® are dedicated to serving Fort Worth residents with integrity, professionalism, and advocacy. No one knows the local market better and no one will care more than a GFWAR Realtor®. Whether you're searching for single family homes or investing in rental properties, you can find a dream Realtor® to work with right here on our website.

In addition, GFWAR Affiliate members work closely with Realtors® to ensure you receive the best service throughout your home buying process. Visit the list of GFWAR Affiliates to explore a list of lenders at local mortgage companies.