Mortgages 101: Everything To Know Before Buying a Home

Are you a first-time home buyer navigating the world of mortgages?

Do you feel overwhelmed by the information out there?

Let us help you rid the confusion and gain some clarity! In this quick guide, we’ll review everything you need to know about mortgages to help you with your homebuying decision. Read on and learn!

First off, what are mortgages?

In short: A mortgage is a loan that you take out in order to buy a home. These loans are typically large sums of money — think $100,000 plus — and allow you to pay back that money at a low-interest rate. The mortgage takes various forms, whether buying your first, primary home, or in the future, a rental property. The takeaway here is that mortgages are the biggest financial commitment you will make, so naturally, knowledge is key.

What are the types of mortgages available?

In the US, there are several key mortgage types that you, as a first-time homebuyer, should be acquainted with. Let’s go through those each now:

The first is a 30 Year Fixed Loan. This is the most typical mortgage loan offered, and almost every lender will have them. They have varying terms and different requirements. The thing to know about 30 year fixed loans is that they are not backed by the government. They’re best for borrowers with a) good credit and b) large downpayment (up to 20%). Lastly, they are fixed-rate fixed loans. This means the interest rate you sign on is the one you will have through the lifetime of your mortgage term.

The second type is a 7/1 ARM mortgage. A 7/1 ARM Mortgage is a loan with a fixed interest rate for the first seven years and then an adjustable interest rate for the remaining term of the loan. The "7" indicates that the initial fixed interest rate period lasts for seven years.

After that, your interest rate will adjust annually based on market conditions - but it will never increase more than 2% per year or decrease more than 7% from the interest rate at the time of your initial fixed period. 7/1 ARMs are usually used to buy homes that people do not intend to live in for more than seven years or so. This type of mortgage makes sense if you think you'll move before the initial fixed interest rate period ends, as it will save you money on interest payments over the life of the loan.

The third type is an FHA loan. This type of loan is backed by the Federal Housing Administration. Unlike conventional loans, to be an FHA loan borrower, you don’t need to have exceptional credit; in fact, lenders will work with challenging credit and lower income. This type of loan offers the incentive for lower down payments, which can help ease the borrower into buying a home.

The forth type is a VA loan. This is a very specific loan type that’s reserved for USA veterans and service members. Unsurprisingly, it’s backed by the Department of Veteran Affairs. The benefits? A $0 down payment incentive and access to lower-than-average rates.

The final type is a USDA loan. These are backed by the Department of Agriculture and are primarily the go-to for borrowers living in more rural areas. The appeal of these loans for those that qualify is $0 down payments and lower than average rates.

Knowing which loan you’re able to go after is a key step in getting your first mortgage. Our experts are ready to help you find which loan best fits your needs - contact our concierge team today.

What are the different components of a mortgage?

While mortgages at face value can be overwhelming, we’re here to reassure you that they truly aren’t once you are familiar with their components.

To help you understand them, below is a breakdown of the core parts of a mortgage you should know:

Down Payment

This, as we’re sure you know, is the amount you pay out-of-pocket towards your loan. Often this comes from savings or family gifts.

Loan Amount

This is the total sum of the loan you’re borrowing. It’s the total loan minus the down payment.

Loan Term

Simply put, this is the amount of time it’ll take to pay back your lender for your loan amount. It’s broken up into monthly payments.

Interest Rates

You’ve likely heard quite a bit about these in the news lately. Interest rates are the cost of borrowing money expressed as a percentage. Mortgage rates are expressed as a percent of the borrowed amount, just like auto loan rates.

How do I qualify for a mortgage?

It’s important to note that what we’ve outlined below are general qualifications for each loan; however, you should acknowledge that every lender is different. It’s also important to note that we’ve created strategic partnerships with our premier lenders to help work with potential homeowners who may face challenging credit situations and come from multiple financial backgrounds.

In order to qualify for a mortgage, you will always need to have a minimum down payment for that loan, a credit score minimum, and a maximum debt-to-income ratio (essentially, how much of your monthly income goes towards debt payments).

For conventional loans: A borrower typically needs a minimum down payment of 3% of the purchase price, a minimum credit score of 620, and a debt-to-income ratio of a max of 45%.

For VA loans: A borrower does not need to have any minimums, which is a great perk for those that qualify.

For FHA loans: A borrower typically needs a minimum down payment of 3.5% of the purchase price, a minimum credit score of 500, and a debt-to-income ratio of max of 50%.

For USDA loans: A borrower does not need a minimum down payment or minimum credit score, but you will need to have nothing larger than a debt-to-income ratio of 41%.

What are the steps to getting a first mortgage?

There are several key steps to getting a mortgage. First, you will apply for a mortgage pre-approval. This will let you know how much mortgage you can qualify for. Next, you will get your approval letter which will inform how you will work with a realtor to find a property. Once you have a property and make an offer, you will then verify details and close.

Do I need to put 20% down for a mortgage?

While 20% down payment on a mortgage is definitely recommended, it’s not necessarily something you have to do. As seen above, most down payment requirements are a mere 3%.

That being said, you should know the benefits of providing a 20% down payment.

First off, giving a larger down payment will allow your loan amount to be less, which in turn, can help you save on interest in the long term. This is a major win for you over the course of your loan.

Aside from that, if you provide a down payment below 20%, you automatically have to pay what’s called private mortgage insurance (PMI for short). This is an extra monthly payment that’s included in your mortgage payment every month.

If gathering enough money to cover closing costs and down payment is a struggle for you, then having a down payment below 20% with PMI makes the most sense.

Are there any other mortgage closing fees I should know about?

Yes, there are additional fees you should keep in mind that will be due upfront for your mortgage. While down payments will be the largest sum you will have to provide, there are also closing fees.

For those who aren’t aware of these, closing fees are various costs that help to set up your mortgage and transfer ownership from the seller to you.

Oftentimes, the total closing fees are 3%-5% of the loan amount.

A great example for reference is if you are securing a $300,000 loan, you can easily need to have $9,000 on top of your down payment to afford it.

Closing costs and fees are often overlooked by first-time home buyers, so make sure you are saving carefully and planning ahead!

Am I locked into my mortgage for 30 years?

No! While you sign a mortgage term of 30 years, you aren’t stuck with your mortgage for those full 30 years. You don’t have to keep the loan until its end date and pay it off in full. In fact, most homeowners don’t. They either sell or refinance the home before their mortgage term is up.

Final Thoughts

Ultimately, the right mortgage type and mortgage term will be up to you and your mortgage professional to decide. There are plenty of options available to you, which makes it a lot less scary – the right situation exists! In the meantime, if you have already been pre-approved, start your search today with HBFA. Our team is on standby: