Understanding The Homebuying Process For First Time Homebuyers

Buying your first home can be both exciting and scary. 

For those looking to purchase a home for the first time, the journey begins with understanding how to secure a mortgage. There are many options to consider and with the right guidance, homebuyers can secure a mortgage that meets their needs.

At Arkansas Federal Credit Union, our lending experts are well-versed in helping find the best mortgages for first-time buyers. This includes providing information on what mortgages are available for first-time buyers and how to select the right one.

The first step is to understand mortgage rates to identify which loans will meet your needs. From there, homebuyers should get pre-qualified so they can begin the exciting journey of looking for their new home.

The Impact of Credit Scores on Mortgage Rates

Taking steps to ensure you get the best mortgage rate is the first step in understanding how much home you can afford. 

To begin, borrowers need to know how their credit score will impact their mortgage rate. For example, “in 20 years, someone with a 680-699 score will still pay over $20,000 more in interest on a $244,000 mortgage than a person with a high score” (Forbes Advisor).

Once borrowers understand their score and its potential impact on their mortgage, they can begin working on defining their budget. Budgeting for home ownership goes beyond the monthly mortgage expense. Homebuyers also need to estimate utilities, services such as trash collection, repairs, and maintenance costs to accurately understand what they can afford.

Different Types of Mortgage Loans for First-Time Buyers

Once you understand the impact of your credit score and set a budget, it’s time to decide which type of mortgage will help you achieve your goals. There are five basic mortgage loan categories to choose from:

Conventional Mortgages

This a great loan for first-time buyers with good credit (620+) and the ability to make a down payment of 3%-5%.

Additional requirements include purchasing private mortgage insurance (PMI) and having a low debt-to-income ratio. 

Fixed Rate Mortgages

As the name suggests, these loans have a fixed interest rate that never changes allowing first-time buyers to know exactly what they will be paying for the life of the loan.

Additional requirements include a down payment, a credit score of 620+, the ability to pay closing costs, and a low debt-to-income ratio. 

Adjustable Rate Mortgages

Similar to Fixed Rate Mortgages, these loans are defined by how the interest rate is assigned throughout the life of the loan. In the beginning, the interest rate is lower. However, it grows over time. These loans are good for borrowers who expect their earning potential to grow over time. 

Additional requirements include a minimum down payment (around 3%), a credit score of 620+, and a low debt-to-income ratio. 

Jumbo Mortgages

As of 2022, these mortgages cover purchases that exceed $647,200 and require a significant investment on the part of the buyer. Buyers must be able to make a minimum 10% down payment and pay closing costs (2% to 6% of the home cost).

Additional requirements include a 680+ credit score, a debt-to-income ratio of less than 45%, and a maximum loan-to-value ratio.

Government Insured Mortgages

Government-backed mortgages are great for first-time homebuyers who do not have perfect credit or who fall into the low-to-moderate income category. Since they are backed by the federal government, they are a great option for first-time buyers to get a mortgage. 

• FHA Loans – These loans are made possible by the Federal Housing Administration and provide homeownership opportunities for any borrower throughout the U.S. They offer the additional benefit of helping borrowers with credit scores as low as 500 purchase a home. Down payments range from 3.5% to 10% in addition to paying a mortgage insurance premium (1.75% of the purchase price).
• USDA Loans – USDA loans are great for low-income borrowers who live in eligible areas – densely populated areas such as major cities are excluded. The loans do not require borrowers to make a down payment. However, borrowers must make an initial mortgage insurance payment to finalize the purchase.
• VA Loans – Backed by the Veteran’s Administration, VA loans serve active-duty service personnel, eligible veterans, eligible spouses of veterans, and anyone who served during WWII with a U.S. ally. These loans do not require a down payment or private mortgage insurance. Buyers who qualify only need to make a one-time payment to initiate the loan – approximately 1.4% to 3.6% of the total loan amount. 

The Mortgage Application Process Begins with Getting Pre-qualified

Once buyers have decided which type of mortgage will best serve their needs, it’s time to begin the mortgage pre-qualification process.

For first-time homebuyers, the importance of getting pre-qualified may not be obvious. First and foremost, a pre-qualification lets sellers know that you are capable of getting funding. Buyers with pre-qualified mortgages will surely be taken more seriously than those who are not pre-qualified.

Additional benefits include giving buyers insight into their monthly payments, exactly how much home they can afford, and how much money they will need to close on their first home.

Steps to Mortgage Pre-qualification

1. Identify potential lenders and apply online or in person 
2. Receive pre-qualification offers
3. Review offers to compare rates and fees
4. Select a lender to work with and get pre-qualified

Now that you are pre-qualified, it’s time to start shopping for your dream home. To learn more about mortgages available for first-time homebuyers, contact the mortgage experts at the Arkansas Federal Credit Union. We can help you identify the best type of mortgage, understand your budgeting needs, and help you get pre-qualified to make your home ownership dreams come true.