Want to buy a house but have no idea where to start? You've found just the guide you need! In this post I'll show you how to figure out how much of a mortgage you can take on. How much you'll need for downpayment. How to apply for your mortgage and more. The entire 7 step process to get your first time homebuyer mortgage is right here!
Have you been thinking of buying a house? Have no idea where to begin with the process? This guide is for you. I’m going to walk you through each step of the getting your first time home buyer mortgage in 7 steps!
Unfortunately the house buying process has become ridiculously difficult. On top of that, it’s also extremely expensive. No wonder, millennials have been waiting longer and longer to buy their first home.
If you’re ready to buy your first house I want to simplify the first time home buyer mortgage process for you and build a reference you can use as you go through the mortgage process. If you aren’t ready to buy yet, bookmark this guide and it will be there when you need it.
Let’s get to it. Here is a step-by-step actionable guide to get your first time home buyer mortgage.
STEP 1 - CHOOSE THE TYPE OF FIRST TIME HOME BUYERS MORTGAGE YOU ARE GOING TO APPLY FOR
First time homebuyers have access to a couple different loan options. Before you get started you’ll have to decide which one is for you. I’ll walk you through the process, but to get started here is a brief summary of each type of loan:
The FHA is great first time homebuyers loan because it only requires a 3.5% down payment as long as your credit score is at least 580. (We’ll talk about that in the next section.)
If you’re credit score is between 500 and 579 you can still get this loan, but they will require a 10% down payment.
The VA Loan is a great option for veterans. This loan requires no downpayment, but you’ll need at least a credit score of 620.
If you’re a veteran, generally this is your best option. It’s a great loan, but only available to veterans.
STEP 2 - CHECK YOUR CREDIT SCORE
Once you’ve got an idea what kind of loan you are going to apply for, you are going to need to find out what your credit score is.
A great tool to do that is Credit Karma. It’s free and it doesn’t affect your credit score. Download the app or check out the website. It will provide you with your Trans Union and Equifax score.
They may be slightly different but it will give you a good idea of what your score is. That will help you determine whether you can qualify for a FHA Loan or VA Loan.
If you credit score isn’t high enough then you’ll need to work on getting that up. Check out my guide to improving your credit score here.
If you’re above the minimum, congrats! Continue on to the next step.
STEP 3 - FIND OUT HOW MUCH OF A MORTGAGE CAN YOU AFFORD
Before you really looking for a house you have to determine what you can afford. A lender is looking for your total debt payments to be less than 45% of your income when you own the house. This is a bit ridiculous though. This amount makes it very difficult to make your payments when a major expense comes up or if you were to lose your job.
A much better amount to shoot for is 33%. That would mean 33% of your income is going to debt. This is a common recommendation and is definitely much better than 45%.
Even better though is 25%. With only 25% of your income going to your house payment you still have 75% of your income left over for day to day expenses and your other expenses that may come up. If you can find a house with a payment of only 25% of your income it will make it much easier to make your payments.
To make all of this much simpler, here is a calculator from Zillow you can use to help determine how much house you can afford.
Once you know how much you can afford, it’s time to think about the down payment.
STEP 4 - MAKE SURE YOU HAVE ENOUGH MONEY FOR YOUR MORTGAGE DOWN PAYMENT
If you’re a veteran and you’re going with the VA Loan you don’t need a down payment. Move on to the next step.
If you’re going with a FHA Loan and your credit score is 580 and up, you’re going to need a 3.5% down payment. If your credit score is 500 - 579, you’re going to need a 10% downpayment.
To calculate how much you’ll need, multiply the price of the house by the percentage of the downpayment. For example, if you’re buying a $200,000 house and you need to put down 3.5% you will need $7,000.
Here is a simple formula you can use:
HOUSE PRICE:_______________ x DOWN PAYMENT PERCENTAGE:__________ = DOWN PAYMENT
$200,000 x .035 = $7,000
After you figure out your downpayment, you’ll need to make sure you have that amount in your bank account and ready to go. No credit cards allowed on mortgages.
STEP 5 - COMPARE MORTGAGE LENDERS ONLINE
To compare lenders you can use a mortgage lender comparison tool like Nerdwallet.
Here are some of things you will want to look at when comparing lenders.
Take a look at the reviews for that lender. This will help you determine the experience others have had with that lender. A good place to look is on Google Reviews. See what others say about the experience.
If the consensus is that they are hard to work with and have bad customer support, stay clear of that lender.
This is a fee the bank charges you to obtain the mortgage loan from them. They will charge this fee as a percentage of your mortgage value. The more mortgage you take on, the more you will pay in fees.
Compare each lenders origination fee. Obviously the lower the fee the better.
Another very important number to compare is the interest rate. This will affect you for the long term and makes a big impact on how much your monthly mortgage payment will be. The lower the better.
This is the most important value to focus on. You definitely want the lowest interest rate you can get.
Each month when you make your mortgage payment you will also be paying the interest from this interest rate.
Here is how you calculate your interest payment:
(Mortgage Balance x Interest Rate) / 12
Here is an example:
$200,000 x .0425 = $8,500
$8,500 / 12 = $708 in one month!
That’s a big number, so it makes sense to try to get the lowest interest rate possible.
You also have to watch out for the application fee. You’re already getting fee’d to death and then they add another fee.. It’s never ending with banks.
If their application fee is insanely high compared to other lenders, it may be better to look elsewhere.
STEP 6 APPLY FOR YOUR MORTGAGE TO GET PREQUALIFIED
Once you’ve picked a lender it’s time to apply for approval. Make sure you are aware of your credit score and you know how much of a mortgage you can take on before contacting the lender.
You may have to pay the application fee up front so make sure you have the money ready. You will aside set aside money for closing costs. For a temporary number, set aside 5% of your expected mortgage for closing costs.
It will change as the lender gives you the final numbers closer to closing, but that is a good amount to set aside initially.
Today most all lenders allow you to file the application online, so you won’t even have to leave your house. Ahhh, technology. :)
The application will ask you a lot of personal questions about your identity, job history, assets, income, debts, etc.
It’s a straight forward process that may take you an hour or so at most.
STEP 7 - SUBMIT FINAL DOCUMENTS TO GET PRE-APPROVED FOR YOUR MORTGAGE
Once you’ve sent your application, if all is good you will be pre qualified, but you will still need to provide lots of proof to be fully qualified.
Just like the application you should be able securely upload digital copies of all the information they need.
Here are some common items they will need to verify your information on the application:
Proof of Income like pay stubs or W2’s
This often takes time for you to pull together and time for your lender to verify.
Once they have everything they need and have verified all the information they will provide you with a pre-approval letter to show home owners that you have the funds needed to purchase their house.
Now comes the fun stuff! Hire a real estate agent and get started looking for your first house! You’ll have peace of mind knowing that you are qualified and can actually afford the houses you will be looking at.
Choose the type of mortgage you are going to apply for.
Check your credit score.
Find out how much of a mortgage you can afford.
Make sure you have enough money for your mortgage down payment.
Compare mortgage lenders online.
Apply for your mortgage to get prequalified.
Submit final documents to get pre-approved for your mortgage.
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