Home Buying » Home Buying Guides » First-Time Homebuyers Full Guide: How To Choose The Right Lender?
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First-Time Homebuyers Full Guide: How To Choose The Right Lender?

If you’re a first-time homebuyer it can be daunting searching for a mortgage. New terms, important decisions and the bugget debt you've ever had. So how to choose the right mortgage as a first tie homebuyer?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Mann (Silvermann) is an experienced investor, financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO


Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Mann (Silvermann) is an experienced investor, financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO


Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table of Content

First time homebuyers account for 33% of all home sales. In this chart using 2020 NAR Trends data, you can see that the 22 to 29 year old age group is the most likely to buy a home for the first time, accounting for 88% of sales. This is followed by 52% of sales in the 30 to 39 year old age group. At the other end of the scale, only 6% of 65 to 73s and 5% of 74+ house sales were to first time buyers.

First Time Homebuyers in Age Group

What Are The Mortgage Options For First-Time Homebuyers?

Now, you’re going to have to take a look at conventional loans or government-insured loans in order to get that first house.

You’re not going to have these same options again if you buy a second home, so look closely.

1. Conventional Loan

When we talk about conventional loans we’re talking about the type where the federal government isn’t helping you in any way. You’re responsible for everything and if you default the loan company will come after you, not the government.

The standard options here are fixed and adjustable rate mortgage, but there are others you should take a look at as well.

  • Interest Only – This type of mortgage means that you get a set period of time where you don’t actually make any payments on the mortgage principal (the amount that you borrowed). Instead, you only have to pay the interest during that period of time. Once that time is up you have to start making payments that cover both the principal and the interest.
  • Balloon Mortgage – This type of mortgage can be a little tricky. What happens is that you have a very short term for your mortgage, which is generally between 5 and 7 years. Up until that point you make smaller payments and then you’re required to pay off everything as a lump sum at the end of that short term.
  • Reverse Mortgage – With this type of mortgage you don’t have to make any payments until you move out of the house or your survivors make payments after you’ve passed. It’s generally only available to older individuals.

2. Government-Insured Loans

When we talk about non-conventional loans or loans that are backed by the government we’re looking at the type that’s a little easier to get for those with not-so-great history. If you don’t have a lot of money to put down or you have a lower credit score these can be a good option.

They may get you qualified where you wouldn’t have been before.

  • FHA Loan – An FHA loan can be approved with as little as 3.5% down and all you need is a score of 580 or more. For those with a lower score, to as low as 500, a 10% down payment will be sufficient. Now, you’ll have a higher interest rate the lower your credit score is, but you’re going to have the opportunity to get a loan.
  • VA Loan – A VA loan is actually backed by the Department of Veterans Affairs and it’s designed only for those who are actively serving or have served in the U.S. Military. Also, they’re going to work with specific lenders to get you the money for your loan.
  • USDA/RHS Loans – Finally, these types of loans are offered to individuals living in rural areas who aren’t able to get the housing that they need with a conventional loan. They need to have a steady income that’s low or modest in order to qualify, which must be no more than 115% of the adjusted median income of the area.

It can be really strange trying to understand all of the different terms and companies that are related to your mortgage, so let’s dive into just who you’re going to be working with.

  • Correspondent Lender – This lender is actually a mortgage company that will give you the original mortgage but then they sell it off to a larger company or bank.
  • Credit Union – Credit unions are generally better than traditional banks because they answer to their members. This makes them less focused on what money they’re going to make and a little better about loans.
  • Mortgage Broker – A mortgage broker is a company on their own that only works with writing loans. They generally work with larger organizations like direct lenders, banks and large lenders writing up their loan files.
  • Direct Lender – These are financial institutions like US Bank or Citibank that will write up your loan for you. A loan officer will write everything up and you don’t have to worry about the middleman.

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Fixed Vs Variable Mortgage: Which is Better For First Time Homebuyers?

A fixed-rate mortgage means that your interest rate is going to stay the same for the life of the mortgage. An adjustable-rate mortgage means that your interest can change at set points of time during the life of your loan. It may seem a little strange, but there can be some benefits.

Now, let’s take a closer look at just what it means.

  • Adjustable-Rate Mortgage Benefits

So, just why should you be looking at an adjustable-rate mortgage? Well, there are a few reasons to think about it.

    • Lower Interest Rates – When you start out with this type of mortgage you generally get a low-interest rate compared to what a traditional 30-year mortgage looks like. Then, you’re locked into that interest rate for a set period of time that could be 3 years to 10 years (which you’ll know when you sign up). You then get your interest rate adjusted every 6 months or 1 year (also explained when you sign up) over the remainder of the loan.
    • Flexibility – If you’re expecting to move or to sell your home within the next few years then this can be a great way to go. It can help you to get the lower rate interest in the beginning and then you can sell out of the house before any of the rates actually change.
    • Lower Monthly Payments – When you start out you’re going to have a lower interest rate, which means you’re also going to have a lower monthly payment. That can help you keep a little more money in your bank account instead of paying it toward your house.
    • Rate Caps – There is a cap on the amount that your mortgage or your payment amount can rise, even with adjusting based on the interest, so this still keeps you a little safer.

You can get a better picture of your payments by using an adjustable-rate mortgage calculator.

  • Fixed-Rate Mortgage Benefits

Now, when we talk about fixed-rate mortgages there are definitely benefits here. It’s great for those who have a stable career and don’t see themselves moving, who loves the area and who lives and/or works here already.

For those individuals, fixed-rate can be a great way to go.

    • Constant Payments – The payments that you’re making are going to be the same from the beginning of the loan until the end. That means you don’t have to worry about paying more some periods and paying less on others. You can count on your mortgage payment remaining steady.
    • Constant Interest – Also, you don’t have to worry about your interest rate changing. Whatever you’ve locked in with that’s what you’re going to keep for the rest of the loan term, so you don’t have to worry about what the interest rates in the market are doing.
    • Easy to Compare – If you decide to look at refinancing somewhere down the line it’s actually simple to do because you can easily compare what you have to what you might be getting.

First Time Homebuyers: Things To Consider

Here are the main things to consider when looking for a mortgage as a first time homebuyer:

  • The Loan Term

The term is going to tell you more about your payment and your total cost than anything else. If you take out a longer-term you’ll have a lower payment, which can make it seem more appealing to go with a 30-year mortgage versus a 15-year, for example.

On the other hand, you’re going to pay more on that longer-term because you have more interest charges.

Shorter term mortgages mean that you’re going to pay off that house quickly and then you can use that money for other things. Use an online calculator where you can compare the difference between 15,20 and 30 years mortgage.

You could invest it or put it away for retirement or anything you want. You also want to look at things like property taxes or homeowners insurance. Also, look at PMI, which is a special insurance you have to use if you put down less than 20%.

  • APR

Look at the interest rates you’re being offered from different institutions and don’t just go with the first one.

You want to have a great credit score and then you want to get a great rate based on that score. It’s going to help you with the applications and make sure you’re paying less overall. When you start looking at different places to get your mortgage you’re likely going to see APR changes quite a bit from one to the next.

This is going to show you some options, but also make sure you’re getting quotes based on your factors. If you get a quote online you may not actually be getting a firm quote, the type they have to stick to.

A lender needs to evaluate your credit before they can give you a set rate and then you can decide if you’re going to go with them. You want to make sure you look at other factors besides just the interest rate as well, but don’t underestimate this.

It’s one of the biggest expenses you’re going to have in your mortgage, so make sure you look at the options and even look at things like discount points, which some mortgage lenders will offer.

These help you out by charging you a bit up front for a lower interest rate over the full loan term.

  • Lender Reputation

You want a lender that you can count on and that means you want to look at referrals. It may seem strange to ask for mortgage lender referrals but talk to your real estate agent or people you know. They can tell you who’s the best around.

You can also look at the J.D. Power and Associates customer satisfaction index rating. This will show you more about customer satisfaction and who’s been happy with their service.

J.D. Power U.S. Consumer Satisfaction Study 2020

You’ll also want to see if the company is registered with the Better Business Bureau and see what their rating is. The local Chamber of Commerce, any city or state protection agencies and more are all good places to look for comments or complaints. You should also look at how they handle any complaints that are made.

  • Overall Terms and Payments

There are going to be different down payment requirements for different types of loans as well. If you’re using a conventional mortgage you generally need 20%. If you’re using an FHA loan you could get a down payment of as little as 3.5%. If you do offer a lower down payment, however, you’re usually going to pay more over time.

Next, take a look at whether there’s a penalty on prepayment. If you decide to pay ahead and get rid of your mortgage before the term is up can the mortgage lender come after you with an extra charge?

Finally, make sure you know how long it will take from full approval to actually getting the money, which could take between 21 and 45 days. You want the money as quickly as possible to make a home purchase.

How Can I Get The Best Rate On My Mortgage?

You absolutely want to keep your rates as low as you can and that’s going to require a bit of effort on your part.

Let’s take a look at just what you need to do.

1. Shop Around

With so many different options out there it’s important to do a lot of research and see what you can find. Don’t just apply for any loan.

You want to know what your situation is and what you have to offer and then start doing some research. When you do start shopping around you want to look at costs and terms, but don’t be afraid to negotiate.

You can start out looking at basic information that’s available anywhere and then actually start talking to lenders. After all, if you go in with a little bit of information you’re going to be ahead of the rest.

You could end up saving thousands if you’re careful about what you’re doing and you do the comparisons the right way.

2. Understand Your DTI, Payoff Debt

You should absolutely know your debt-to-income ratio before you start doing anything about mortgage shopping. This is the amount of money that your debt is costing you each month compared to the money that you have coming in.

For someone who makes $4,000 a month and spends $1,000 a month on their debt that means they have a ratio of 25%. In general, you wan to have your DTI lower than 43% to get a loan, or you’re likely not going to get approved. You want to work on lowering your numbers as much as you can.

Now, you don’t have to have your DTI as low as possible, but keep it at least below 40% and try to get it lower than that. This looks better for the mortgage lender.

So, look at different debts that you can pay off, like a car loan or credit cards. This will save you some money and it’s going to cut your debt-to-income ratio, which is going to look better for your mortgage.

3. Avoid Large Purchases

Your mortgage company can monitor your credit and make changes to your agreement for a period of time after they’ve approved you. That means you want to avoid making any large purchases or getting any large loans.

If you do, the mortgage company can actually change or cancel your mortgage. That’s because they feel like you suddenly have too much debt and you can’t afford the mortgage. Wait until after closing, when everything is done and locked in, to finance anything else.

You should also pay attention to how much money is in your bank account. If you suddenly have a large withdrawal that could also be a red flag to the mortgage lender. So, don’t think that just because you’re paying cash you can get away with those large purchases. It’s still not going to look good.

4. What Can I Really Afford?

In general, you want to look at homes that are no more than 2 to 2.5 times your gross income. If you’re making $100,000 a year you can generally afford $200,000 to $250,000 for your mortgage. But that will depend on a number of other factors as well. You have to look at your specific debt, for example.

You may want to take a look at underwriting rules and see where you stack up with current interest rates, your income, your debt, credit scores and even the down payment you have available. Put it all through that underwriting system and see what you would get approved for.

Online mortgage calculators can give you a general idea, but these aren’t going to give you the exact numbers that you’ll get from a lender, so you want to be careful about trusting them too much. They do take into account different factors however, which can give you a good idea.

House prices can fluctuate over time, which can make planning a home purchase a challenge. However, there is data that shows the most common price brackets of property purchases. In this chart showing 2020 NAR Trends data, you can see that the most common price bracket for home purchases is $200,000 to $250,000 at 15%. However, this is closely followed by the over $500,000 bracket at 13%. The least common price bracket is the $75,000 to $100,000 at 3% of property sales.

Price of Home Purchased

Preparing for Your Mortgage Process

Preparing makes everything easier and it’s going to help you out in the long run, so take a look at what you could be doing to get yourself ready for what’s to come.

  • Know the Type of Mortgage You Want

Take a look at each of the different mortgage types out there and figure out how much they’re going to cost for you. You want to know how long it’s going to take to pay off as well and things like fixed interest, floating interest or a combination.

When you make a decision about your mortgage type you need to weigh in your financial situation and any other types of loans that may be available for you. Then, you can compare the different lenders and see what you think is going to be the best option. As a first-time homebuyer this is actually even more important.

  • Get Organized

Make sure you know what documents you’re going to need and then make sure that you have those documents prepared and ready to go. Even before you start the application process you’re going to want to have the documents you’ll need organized.

This includes things like bank account statements, loan statements, paystubs, tax documents, W-2’s and ID. If you’re not able to find any of these you need to get replacements as quickly as possible.

Having everything together and ready to go is going to make it easier for you to get approved or at least go through the process smoothly when it comes to your mortgage application process.

  • Know Your Credit Score

Take a close look at your credit score before you apply for anything. You can generally get a free copy from one of the many free sites to get a good idea of this. A credit score of 720 or above shouldn’t be a problem for you to get a mortgage loan.

If you’re at least at 620 you should still be able to get approved but at a higher interest rate. Anyone with a score lower than 620, however, is going to have a little more difficulty getting approved.

FICO scores influence whether you may be accepted for credit.  A good FICO score can determine whether you obtain mortgage or finance approval, attractive auto insurance rates or even acceptance for a lease.

In this chart using Experian data, you can see the average FICO score has increased significantly over the last decade. While there was a dip in 2013, the average score has consistently increased year on year.

Average FICO Score 8

  • Know Where Your Down Payment is Coming From

You’re going to need assets to cover that down payment and to show the mortgage company that you’re not completely running yourself out of money. You need to be able to afford a down payment, closing costs and a little extra just in case. You also need to be able to document where this money came from.

You’re not allowed to get this money as a gift from anyone, so you need to show that you’ve been saving money yourself over time.

Keeping everything together, in one account, while you’re saving up for your home could be an easy way to do things. Especially over the two months leading up to your application. This is going to show that your money has been there and is what’s considered ‘seasoned.’ It means you won’t need to explain that money to the mortgage lender.

  • Prepare The Right Questions For Your Lender

Do your research and make sure that you know what you’re supposed to be asking. You don’t want to get overwhelmed or let the mortgage lender take over the meeting.

You need to take a little time to figure out what will work for you and how you can get the best loan possible.

Mistakes to Watch Out For 

As a first time homebuyer, your mortgage is going to be a very big debt and it’s covering the most expensive purchase you’re likely ever going to make.

You’re likely to be quite stressed, concerned and just confused going into this process.

That’s why you want to make sure you’re avoiding the most common mistakes that new homebuyers tend to make.

1. Buying a Home They Can’t Afford

You’re generally going to be approved for a large amount for a mortgage and that doesn’t mean you can actually afford that much.

You want to make sure you have enough money to make a good down payment (if you don’t that’s a good sign you’re not really ready). You also want to make sure that you’re not stretching your budget to make it work.

You should be able to pay for unexpected expenses and your home.

2. Forgetting the Outside Expenses

Owning a home isn’t just about paying your mortgage. You also need to pay for routine maintenance costs.

In general, it’s recommended that you save at least 1-2% of your home’s value for these costs. That means a $250,000 house would be about $2,500 to $5,000 for repairs or maintenance that needs to be done.

You’ll also want to look at property taxes, which you’ll need to pay if they’re not included in your mortgage payments.

3. Jumping at the First Loan Offer

Don’t just jump and choose the first mortgage that you look at.

You could be paying a whole lot more than you actually need to be.

4. Ignoring Your Credit Report

You absolutely need to know what’s on your credit report and you need to fix any mistakes before you apply for a mortgage.

This could save you thousands of dollars in the long run in interest rates.

You want to start looking at your credit report at least 6 months and preferably a full year before you think you’ll be ready to buy so you can work on making changes and improvements.

5. Ignoring Your Options

We’ve talked about some of the different loan options that are out there, so don’t ignore those options just because you’re not sure how they work or if they would be good for you.

Take a look at your situation and circumstances and then make sure you get a full understanding of those options before you decide on something specific.

You can talk to your lender about how each loan type works and even find out about worst-case scenario situations so you’re prepared before you get there.

6. No Money Down

There are lenders that advertise where you can pay no money down or very little down for your mortgage but that’s generally not a good idea.

You’re going to have to pay extra insurance if you do this and that will definitely eat into your monthly budget.

Putting at least 20% down is generally going to be the best way to go because it’s going to save you the most in the long run.

A larger down payment will give you even better benefits, but it’s not necessary with most mortgage options.

Questions You Should Ask Your Lender

There are a number of different questions you should be asking the mortgage lenders when you are looking to  get a first time homebuyer mortgage . After all, they’re going to be asking you a whole lot of questions about your income, your expenses, your down payment and more.

So, make sure that you’re turning the tables back around and that you’re getting all of your questions answered at the same time. You should be looking at things like:

  • What Mortgage Types Should I Look At?

A fixed-rate mortgage will give you the same interest rate from beginning to end. An adjustable-rate mortgage will change the rate after a specific introductory period and at regular intervals.

For those who aren’t going to stay in a house long enough to leave the introductory period it might be a good idea to go with an adjustable-rate mortgage to help save some money.

  • What is the APR and the Interest Rate?

You want to know both of these because they’re going to be a little bit different. The APR is the total percentage over the full term of the loan.

The interest is the part that most mortgage companies will tell you however, and that’s going to be a much lower number. It’s only a part of the monthly payment that you’re going to be making.

  • What do I Have to Put Down?

Know what the minimum down payment is for the type of loan that you’re considering and work from there. If you have an FHA loan you may only be required to put 3.5% down. If you are getting a conventional loan you may need that full 20%.

If you put down less money you’re going to pay more over the long run.

  • What Are the Fees and What Discounts Are Offered?

There are fees that you’ll have to pay when you get a mortgage. These are generally referred to as ‘points’ and you pay them during the closing process. If you pay more points you actually decrease the interest rate. Paying zero points will save you a little upfront but charge you more in interest over the long run.

Keep in mind that each point you pay for saves you about 1% of your total loan amount in interest.

  • How Do Rate Locks Work?

Sometimes you’ll have a mortgage lender that works with rate locks and actually changes your interest rate. But they change it on their end, not yours. That means if the interest rate drops and they have to pay less for that money they’re going to get a bigger profit on your mortgage.

On the other hand, if rates don’t go down and instead go up they might say that there’s something wrong and that they can’t close out your loan, making you pay for the higher interest rather than getting out before there’s a problem.

  • How Much Time Does the Loan Process Take?

You want to know how long it’s going to take to get the funds so the purchase contract can be written up the right way. You need to have a closing date, after all, so look at what your mortgage lender says here.

First-Time Homebuyers FAQs

Prepayments may not be allowed in your state so even if the mortgage lender says there is one make sure you do your research. You want to know if you can get out of the mortgage early and save some money

As per the bill, homebuyers who can meet the following conditions will receive credit:

  • Must be a first-time buyer
  • Must not own a house in the past 36 months
  • Must not exceed income limits in the region
  • Must buy a main home-no second home, or rental property
  • Must be at least 18 years old or married to someone who is at least 18 years old
  • Must buy a house from a non-relative

There are currently two types of government-sponsored loans that allow you to purchase a house without a down payment:

  • USDA loans
  • VA loans

These loans have very specific sets of criteria that you need to meet to qualify for a payment mortgage with no money down.

If you find that you are not eligible for a VA or USDA loan, you may want to obtain a government-backed FHA loan or a traditional mortgage. Both of these options allow you to pay a low down payment.

If you want a non-resident co-client to get a traditional loan, they need to sign a mortgage and agree to repay the loan if the main tenant fails. However, the non-resident’s joint customer does not need to be on the ownership of the house.

The lender will check your credit and the credit of the non-showing co-customers to determine if you can get a loan. An FHA loan is a special type of government-backed loan that allows you to buy a house with a low credit score and a down payment as low as 3.5%.

If you want to obtain FHA loans from a non-resident joint client (you can have up to two), your joint client must meet some basic criteria, such as being a close friend or relative.

Mortgage companies use different loan standards. The kind of mortgage you get and the amount of money you borrow also factors into whether you are accepted.

The mortgage company conducts affordability checks to determine whether you can manage the repayment and not get in a financial bind. After all, these companies don’t want the risk of not getting a payment or having to withdraw it.

On the mortgage application you submit, the mortgage company will check your budget total and the mortgage amount to make sure you can make:

  • Your mortgage repayments
  • Your household expenses
  • Other living expenses