Buying a home is an exciting time in your life but if you’re a first-time home buyer it can be a challenging experience. Successfully navigating the mortgage process is easier if you have a professional team of home loan advisors at your disposal. Our mortgage guide shares everything you need to know about securing finance to buy your dream home.
What is a mortgage?
Unless you’re lucky enough to buy a house outright, most first-time buyers will need to take out a mortgage to buy a home. In a nutshell, a mortgage is a loan from a bank or other financial institution paid back by the borrower in monthly installments at a specified interest rate, over a certain period of time, typically 25 or 30 years.
The good news is, as long as you can meet the minimum standards of your chosen lender, you shouldn’t have too much trouble securing a conventional mortgage as a first-time home buyer.
What are lenders looking for?
Lenders are looking for low-risk borrowers who won’t default on their mortgage payments. For those applying for a conventional home loan, this means meeting a set of standard lending criteria. While this varies by lender, the criteria generally consist of:
- a down payment
- an average or above average salary
- low or no debt
- a good credit score
When you apply for a mortgage, lenders will look carefully at the documentation you provide to give them an overall picture of your finances and spending history. A mortgage is a big responsibility, often amounting to hundreds of thousands of dollars. If you’re frequently in overdraft or constantly late with bill payments, then a lender may wonder if you’re a good candidate for a home loan.
However, don’t despair! There are a number of things you can do to improve your suitability for a home loan, such as endeavoring to pay your bills on time, paying down sizable debt, and working to improve your credit score.
How much should my down payment be?
As you’ve seen in the list of lender criteria above, having some sort of down payment is a prerequisite when you apply for a mortgage. A down payment is a percentage of the purchase price which usually consists of savings but can be partly gifted by family or friends.
How much down payment you need depends on the lender and the type of mortgage you’re applying for. For example, the industry standard for a down payment is 20% of the purchase price. A 20% down payment is a golden ticket as far as lenders are concerned. It means that you are likely to get offered a lower interest rate, and avoid paying private mortgage insurance (PMI).
But it is possible to buy a home with much less down payment. A HomeReady mortgage requires just a 3% down payment, while a Federal Housing Administration Loan (FHA loan) only requires a 3.5% down payment.
HomeReady mortgages are a solution for first-time home buyers on low-to-moderate incomes who are financially responsible but are struggling to save a big down payment. The 3% down payment for a HomeReady mortgage can come from multiple sources, with no minimum personal funds from the buyer. Mortgage insurance can also be canceled once the borrower’s equity reaches 20%.
FHA loans are also popular with first-time home buyers because of the lower minimum down payment and credit score requirements. FHA loans are offered by approved banks and lending institutions and insured by the federal government. While this sounds good, there are downsides, such as having to pay two types of mortgage insurance premiums: one up front and one charged monthly. However, FHA loans are an option to research if you have a small down payment or lower than average credit score.
How long do I have to pay back my home loan?
One of the many decisions you’ll make during the home loan process is about the length of the loan term. The loan term is the number of years it will take to repay the mortgage in full. For first-time home buyers on average incomes, it’s common to opt for a loan term of 30 years. This keeps the monthly payments manageable.
If you can afford it, it’s worth looking at a shorter loan term of 25 years. Some lenders may even be amenable to a 20-year or 15-year loan term. But you need to weigh up the pros and cons. Although you’ll pay less in interest over the life of the loan, a shorter loan term is much more expensive to service.
What will my monthly mortgage payment be?
Your monthly mortgage payment is calculated from the amount you’ve borrowed, the mortgage interest rate you’re offered, and the loan term. Another factor to take into account is whether the mortgage is on a fixed-rate or an adjustable-rate, the two primary mortgage types.
A fixed-rate mortgage is locked in at a certain interest rate for the life of the loan. No matter what happens to the market, even if interest rates go up or down, the amount you’ll pay each month stays the same. This is an attractive prospect for those who like certainty and are on a strict budget.
Adjustable-rate mortgages are fixed at a certain interest rate for the first 3, 5, or 7 years. After this period the new rate will adjust each year based on market rates. So your repayments may be higher, or if you’re lucky, you can take advantage of a market drop and enjoy a lower payment each month.
Even though a fixed-rate mortgage provides more certainty, it might not be the best deal. According to the National Association of Realtors, five years is typically the amount of time that young home buyers spend in a home before they sell. Be sure to compare interest rates for both fixed-rate and 5 year adjustable-rate mortgages when shopping around.
How to start the mortgage process
Before you start house hunting we recommend getting pre-approved for a mortgage with a REX Home Loans advisor (note that pre-approval is different from pre-qualification).
A mortgage pre-approval letter is a conditional commitment from a lender that they will lend you a specific sum of money and is valid for 60 to 90 days. If you find a house you like, having this letter allows you to go ahead and confidently make an offer. In a competitive market, a buyer who has their mortgage pre-approved is in a powerful position to act quickly.
After your house offer has been accepted
Once your offer to purchase has been accepted, REX will notify your chosen lender who will then send you a commitment letter that specifies the amount of the mortgage loan, the term, the fixed or APR interest rate (depending on the type you’ve chosen), and the monthly repayments. You typically have between 5 to 10 days to accept the commitment letter by returning a signed copy to the lender. At this time, you may have to pay part or all of the origination fees.
By and large, once you receive the commitment letter you can breathe a sigh of relief. This letter is assurance that the finance you need to purchase your home has been fully approved and you can now look ahead to closing and receiving the keys for your very first home!
REX Home Loans’ highly experienced advisors can help you navigate the mortgage process from start to closing and keep things running smoothly. Our home loan advisors don’t work on commission so you can be sure you’re getting the most competitive rates and best deals on the market. Get pre-approved with REX and take one step closer to your dream home today.