Taking On Your First Home Mortgage? Here's Our First-Time Homebuyer’s Guide to Home Loans

Understanding first home mortgages: an introduction

For many, owning a home exemplifies the American Dream, offering stability, investment opportunities, and the freedom to create a space that's truly your own. A first home mortgage is a loan from a lender to help you purchase your first property. According to the National Association of Realtors (2023), first-time buyers accounted for 32% of home purchases last year.

A home loan for first-time buyers can come in various forms. They include fixed-rate and adjustable-rate loans, each with their advantages and considerations. Moreover, there are specialized and affordable options like VA and FHA loans. Knowing the unique features of each helps you select the best option for your long-term goals.

First-time homebuyer mortgage rates: what to expect

One of the most critical aspects of purchasing a home is understanding first-time homebuyer mortgage rates. These rates determine how much you'll pay over the life of your loan and impact your monthly budget.

Factors influencing mortgage rates

Several factors affect the mortgage rate for first-time homebuyers:

• Credit score: Lenders heavily weigh your credit score when setting your mortgage rate. A higher score results in a lower mortgage interest rate. Borrowers who have a score of 760 or above qualify for the best rates (Experian, 2024).
• Loan type and term: The type of mortgage (e.g., conventional, FHA, VA) and the loan term (15-year vs. 30-year) influence rates. Shorter-term loans generally have lower interest rates but higher monthly mortgage payments.
• Market conditions: Economic factors, such as Federal Reserve policies, inflation, and overall economic health, affect interest rates.
• Down payment: Making a larger down payment reduces the lender's risk, often resulting in a lower interest rate.

As of October 24, 2024, the average interest rate for a 30-year fixed-rate mortgage was 6.54% (St. Louis Fed, 2024).  Due to economic factors and Federal Reserve policy, this rate will change in subsequent periods, so staying updated is essential.

Steps to qualify for a first home mortgage

Qualifying for a first home mortgage involves several key steps. Being prepared enhances your chances of approval and leads to more favorable loan terms. Take these steps to be ready.

1. Assess and improve your financial health

Start by reviewing your credit report. You can get a free weekly report from the three major credit bureaus—Equifax, Experian, and TransUnion at AnnualCreditReport.com. Ensure there are no errors, and if your score is low and DTI is high, work on improving them.

• Credit score requirements: Most mortgage lenders require a minimum score of 620 for conventional loans, but FHA loans sometimes accept scores as low as 580.
• Debt-to-Income Ratio (DTI): Compute your DTI ratio by dividing your total monthly debt repayments by your gross monthly income. Banks typically prefer a DTI of 43% or lower.

2. Save for a down payment

While some loan programs allow for low down payments, saving more upfront benefits you in the long run. Conventional loans require as little as a 3% down but putting  20% down eliminates the need for private mortgage insurance (PMI). Additionally, the budget for closing costs usually ranges from 2 to 5 percent of the total loan amount (Freddie Mac, 2024).

3. Get pre-approved

A pre-approval letter from your preferred lender shows sellers you're a serious buyer and helps you understand how much you can afford. This process requires you to provide documentation of your income, assets, debts, and employment history. A pre-approval will give you a clearer budget picture and strengthen your negotiating position.

4. Gather necessary documentation

Prepare all the required documents to streamline the application process. These typically include:

• Proof of identity (driver's license or passport)
• Social Security number
• Your W-2 forms and tax returns from the past 2 years
• Recent pay stubs
• Bank and investment account statements
• Documentation of other assets (like stocks or bonds)
• Information about any outstanding debts

Having the documents mentioned above readily available expedites the application process.

5. Choose the right mortgage

Explore different types of home loans to find the one that best suits your needs.

• Conventional Loans: This option suits borrowers with good or excellent credit and a solid financial history.
• FHA Loans: These loans are government-backed since the Federal Housing Administration insures them. They are suitable for those with lower credit scores and smaller down payments.
• VA Loans: For active-duty military and veterans. They require no down payment.
• USDA Loans: Designed for rural property buyers, offering low interest rates and no down payment.

6. Apply for the mortgage

Once you've chosen a mortgage type, complete the application process with your lender. Ensure all information is complete and accurate to avoid delays. Also, stay responsive and be ready to promptly answer any requests from your lender during the underwriting process.

Tips for first-time homebuyers

Often, first-time homebuyers fail to qualify due to some common pitfalls. However, that doesn’t have to be the case with you. Navigate your first home mortgage successfully by following these practical tips.

Improve your credit score and DTI ratio

Improving your credit score and DTI ratio is one of the most effective ways to secure better mortgage rates. Start by paying all your bills on time, as payment history makes up 35% of your score (myFICO, 2024). Also, reduce your outstanding debt, especially high-interest credit cards. Additionally, cutting debt lowers your debt-to-income ratio and makes you more attractive to lenders.

Budget for all homeownership costs

Be aware of both upfront and ongoing costs associated with homeownership. Upfront costs include the down payment, earnest money deposit, home inspection, and closing costs. Ongoing expenses include mortgage payments, property taxes, insurance, utilities, and maintenance. Additionally, create an emergency fund for unexpected repairs.

Get pre-approved before house hunting

Getting pre-approved for a home loan clarifies your budget and makes you a more attractive buyer to sellers. It sets realistic expectations and can expedite the closing process.

Explore first-time homebuyer programs

There are several programs designed to assist first-time homebuyers. Some options to explore include:

• Down payment assistance: Many state, county, and city governments provide grants or low-interest loans to assist in your down payment and closing costs.
• Tax credits: Some states offer tax benefits to reduce your overall costs, such as property tax credits.
• Homebuyer education courses: Completing a homebuyer education course can make you eligible for specific programs.

Maintain financial stability during the process

Avoid making significant financial changes while applying for a mortgage. Refrain from major purchases like cars or furniture, as these can negatively impact your debt-to-income ratio and credit score. Keeping credit card balances low and staying with your current employer during the application process can enhance your chances of getting approved.

Work with trusted professionals

Enlist the help of experienced professionals and choose a real estate agent familiar with first-time homebuyer options and programs.

How Ent Credit Union can help with your first home mortgage

At Ent Credit Union, we understand that buying your first home is a significant milestone. That’s why we offer a variety of mortgage products tailored to first-time buyers. We make your first home mortgage process as smooth and supportive as possible through:

• Competitive rates: You benefit from our attractive first-time homebuyer mortgage rates, designed to make homeownership attainable.
• Flexible loan options: Choose from Conventional, First-time Homebuyer program, FHA, and VA loans to find the best fit for your situation.
• Low down payment programs: Some of our specialized options, like Ent First-time Homebuyer loans, require down payments as low as 3%.
• Expert guidance: Our experienced loan officers will provide one-on-one support. You will also have access to educational resources and tools to enhance your understanding of home financing.
• Streamlined application process: Our application process is designed to be straightforward and stress-free. You can get easy pre-approval from our local underwriting team, which gets you ready to shop for your dream home.

FAQs

What are the typical mortgage rates for first-time homebuyers?

Mortgage rates vary based on your credit score, loan type, and market conditions. The current average rate for a 30-year fixed mortgage is around 6.54% (St. Louis Fed, 2024).

How can I qualify for a first home mortgage?

You qualify by maintaining a good credit score (ideally 620 or higher), saving for a down payment, reducing your debt-to-income ratio to below 43%, and preparing necessary documentation like proof of income and bank statements. You can also use Ent’s mortgage loan calculator to help calculate your monthly mortgage loan payment.

What documents do I need to apply for a first-time homebuyer mortgage?

You'll need proof of income documents like pay stubs, W-2 forms, and tax returns. Other necessary documents include bank statements, identification, and employment verification. Having these documents ready expedites the application process.

What tips should I follow when applying for my first home mortgage?

Improve your credit score and DTI ratio, budget for all homeownership costs, explore first-time buyer programs, and work with experienced mortgage advisors and real estate agents.

How can Ent Credit Union assist me with my first home mortgage?

Ent Credit Union offers several alternatives, such as Conventional and Jumbo, at competitive fixed or variable rates. Moreover, most of our mortgage options, such as Conventional, VA, and First-time Homebuyer programs, are affordable and require as little as a 3% down payment. Finally, we provide a streamlined application process and expert loan officers to support you throughout your home-buying journey.

Citations

National Association of Realtors (2023, November 13). 2023 Profile of Home Buyers and Sellers.  https://www.nar.realtor/sites/default/files/documents/2023-profile-of-home-buyers-and-sellers-highlights-11-13-2023.pdf

Experian (2024). 760 Credit Score: Is it Good or Bad? https://www.experian.com/blogs/ask-experian/credit-education/score-basics/760-credit-score/#:~:text=A%20760%20FICO%C2%AE%20Score,seriously%20delinquent%20in%20the%20future.

St. Louis Fed (2024, October 24). 30-Year Fixed Rate Mortgage Average in the United States. https://fred.stlouisfed.org/series/MORTGAGE30US

Freddie Mac (2024, April 4). What Are Closing Costs and How Much Will I Pay? https://myhome.freddiemac.com/blog/homebuying/what-are-closing-costs-and-how-much-will-i-pay

myFICO (2024). What's in my FICO® Scores? https://www.myfico.com/credit-education/whats-in-your-credit-score#:~:text=FICO%20Scores%20are%20calculated%20using,and%20credit%20mix%20(10%25)