Buying a home is often a major milestone. Aside from the pride of homeownership, owning a home helps build long-term wealth with each mortgage payment. And with interest rates at historic lows, it could be a good time to buy real estate.
If you’re buying a home for the first time, you can benefit greatly from familiarizing yourself with the homebuying process. The more you know, the more likely you are to avoid any major setbacks. And should you run into any problems, you will at least have an idea of what to do next.
We’re going to walk through several questions you might find yourself asking as you begin your journey toward buying your first home. Here are 23 first-time homebuyer questions, answered.
23 first-time homebuyer questions answered
You will learn a lot during the process of buying your first home. These answers, including how to get a loan, will give you an understanding of what’s to come as your search for, purchase, and move into your new home.
1. How does a mortgage work?
A mortgage is essentially a secured loan that is used to buy a home. Under the agreement between you and the lender, the lender has the right to seize your home if you don’t repay the money you’ve borrowed. For those who already own a home, a mortgage can also be used to borrow money against the value of that property.
2. How long does it take to get a mortgage?
The entire mortgage process — from preapproval to getting the actual loan — can take between three to six weeks to complete when the market is stable. During peak months when the best mortgage lenders receive a higher volume of applications, the mortgage process can take longer. The mortgage process has several parts, and the process can be slowed even further if the lender uncovers any financial issues during its review.
3. Fixed-rate vs. adjustable-rate mortgage: what’s the difference?
Mortgages are offered with either fixed-rate or adjustable-rate terms.
As the name suggests, the interest rate on a fixed-rate mortgage stays the same — or fixed — for the duration of the loan. This allows you to lock in an interest rate that won’t increase if the market rates increase. But it also means your interest rate won’t decrease if the market rates drop.
The most common terms for a fixed-rate mortgage are 15-year and 30-year mortgages, but shorter and longer terms are available. According to the National Association of Realtors, 94% of homebuyers in 2021 chose a fixed-rate mortgage.
With an adjustable-rate mortgage, the interest rate can change according to the market rates. This means your monthly payment can change.
The loan starts with a fixed rate for a predetermined period of time — which could be months, one year, or a few years — and then adjusts each year after that. The adjusted rate depends on the market rates and what is outlined in the mortgage agreement.
4. What is a good mortgage rate?
Currently, interest rates for a 30-year fixed-rate mortgage are up 1.25 points from March 2021 at 4.42% (as of March 24, 2022). The 15-year fixed-rate mortgage and the 5/1-year adjustable-rate mortgage are also rising, at 3.63% and 3.36% (as of March 24, 2022), respectively. Mortgage rates are constantly changing. Yet with the recent Fed hike in the prime rate (March 2022), they are currently trending upward. If you want an idea as to whether current mortgage rates are considered good, visit Freddie Mac to compare current and past rates.
Although mortgage rates are at relatively low levels compared to previous decades, these aren’t the exact interest rates you would receive as a borrower. Although mortgage rates loosely track the benchmark 10-year Treasury note, lenders also consider credit risk and prepayment risk in their loan pricing decisions, as well as their expectations for future inflation and interest rates. The difference between the higher rates you receive as a borrower and the benchmark 10-year Treasury note is known as a spread.
5. What’s a first-time homebuyer loan?
Grants and loan programs for eligible first-time homebuyers are available at the local and national levels throughout the U.S. These programs make it easier for people to become homeowners through smaller required down payments, lower closing costs, and easier credit qualifying.
One such program is the Department of Housing and Urban Development’s Federal Housing Administration loan. These loans are offered by private lenders but are insured by the FHA, which allows lenders to give you a better deal. This can mean a lower credit score requirement, lower closing costs, and a down payment as low as 3.5% of the purchase price, instead of the 20% required with many conventional loans.
Another popular home loan program is the Veterans Affairs home loan program for service members and veterans. Similar to an FHA loan, a VA loan is guaranteed by the VA. This helps eligible service members and veterans purchase a home with more competitive rates, a lower down payment, or no private mortgage insurance.
6. What do you need to qualify for a mortgage loan?
When you’re ready to apply for a mortgage, a lender will require certain information and documentation to determine whether you qualify for a loan.
The exact information required may vary from one lender to another. But according to the Department of Housing and Urban Development, you should have the following information and documentation when you visit with your lender:
- Social Security numbers for those applying for the loan
- Six months’ worth of checking and savings account statements
- Evidence of any other assets, such as stocks and bonds
- A recent pay stub for each applicant detailing your earnings
- A list of all credit card accounts and how much you owe each month
- A list of all accounts and balances due on outstanding loans, such as car loans
- Copies of income statements for the last two years
- The name and address of someone who can verify your employment
7. What credit score will I need to get a mortgage loan?
The minimum credit score you will need in order to get a mortgage loan depends on the lender, the type of loan, and the state in which you’re purchasing the home. For example, to qualify for an FHA loan, you need a minimum credit score of 500. Your credit score will likely need to be higher to qualify for a conventional loan.
In general, the higher your credit score, the better the rates you will receive. Those with credit scores in the mid- to higher-700s will see the best rates.
8. What’s a debt-to-income ratio?
Your debt-to-income ratio measures how much of your monthly gross income goes toward repaying your debts. This percentage is one way lenders judge your ability to repay the mortgage loan. To calculate your debt-to-income ratio, divide your total monthly debt payments by your gross monthly income.
For example, say you have a mortgage payment of $1,300 a month, a $200 car payment, and you pay another $300 a month toward credit card debt. Your monthly debt payments are $1,800.
$1,300 + $200 + $300 = $1,800
If your gross monthly income is $5,000, then your debt-to-income ratio is 36%.
$1,800 ÷ $5,000 = 36%
According to the Consumer Financial Protection Bureau (CFPB), a 43% debt-to-income ratio is typically the highest ratio a borrower can have and still get a qualified mortgage. A qualified mortgage is a type of mortgage that meets certain federal guidelines to help ensure that the borrower will be able to afford their loan.
9. How do you choose a mortgage lender?
To get the best financing deal, it’s important to shop around and compare lenders. There are several different types of lenders, and different lenders will quote you different prices. Shopping around and negotiating with more than one can help you get the best price on your mortgage.
You shouldn’t choose a loan before you know it’s a good deal for you. Request loan estimates from multiple lenders to see which lender is offering you the best deal. Compare these estimates, negotiate for better terms, and then choose the mortgage lender that’s offering the best deal.
10. What are mortgage points?
Mortgage points, also known as discount points, let you make a tradeoff to lower the interest rate on your mortgage. In exchange for paying an upfront fee, your interest rate — and thus your monthly payment — is reduced. Points are paid at closing and increase your closing cost.
Each point equals 1% of the loan amount. For example, one point on a $200,000 loan would be 1% of the loan, or $2,000. Points aren’t always round numbers either. You can pay 1.25 points, 0.5 points, or even 0.125 points.
11. Can you buy a house with no money down?
The amount of your down payment will depend on the type of loan you choose and the lender’s specific requirements. In general, most lenders offering conventional mortgages will require a down payment. Borrowers who choose a conventional loan and are unable to make a down payment of at least 20% of the home’s purchase price may be required to purchase private mortgage insurance (more on that soon).
If you’re unable to save a 20% down payment, you may want to look into home loans offered by the U.S. government, two of which I mentioned above (FHA and VA loans). These programs are more lenient and may require a smaller down payment.
12. How do you save for a down payment?
The earlier you start saving for a home, the better. Down payments are usually required for many conventional mortgages, and a down payment of at least 20% of the home’s purchase price is typically required if you want to avoid purchasing private mortgage insurance. This can be a lot, depending on the price of the home. For example, 20% of a $200,000 home is $40,000.
To save quickly and efficiently, you might want to consider creating a budget. This will allow you to find and stop wasteful spending and determine how much money you can allocate to saving for a down payment each month.
Depending on how far into the future you plan to buy, you’ll need to decide where to save money for your house. A high-yield savings account or certificate of deposit (CD) might be worth considering if you plan to buy within the next five years.
13. What are closing costs and how expensive are they?
Closing costs are fees and charges associated with purchasing a home. They can include:
- Appraisal fees
- Title insurance
- Government taxes
- Lender fees
- Prepaid costs, such as property taxes and homeowners insurance
Buyers typically pay the majority of closing costs. However, buyers and sellers can come to an agreement where the seller assumes some of the closing costs. Who pays what at closing also depends on state law.
14. What is private mortgage insurance (PMI)?
Private mortgage insurance is a type of insurance you may be required to purchase if you have a conventional mortgage. Buyers who make a down payment less than 20% of the home’s purchase price are typically required to purchase PMI. PMI is meant to protect the lender, and helps them alleviate some of the risk if you stop making payments on your loan.
PMI is arranged by the lender and is provided by a private insurance company. In many cases, PMI is added to your mortgage payment, though your lender may have options to pay your PMI in one upfront premium paid at closing or a combination of upfront and monthly premiums.
15. Should you get a mortgage preapproval?
A mortgage preapproval is a letter from a lender that says it is willing to lend to you. A mortgage preapproval letter means a loan officer reviewed your finances — income, debt, and credit history — and determined how much money you can borrow, what your monthly payments could be, and what your interest would be.
Although not a guarantee that you’ll get a loan, this letter is important when it comes to making an offer on a home, as it shows sellers you will be able to get financing to buy the property.
16. What is a buyer’s agent?
A buyer’s agent is a realtor who is legally bound to help the homebuyer in a real estate transaction. A realtor with a fiduciary duty to help the home seller is known as a listing agent.
Buyer’s agents assist in the home buying process in a number of ways, from finding the right property to negotiating the offer to putting you in contact with other professionals, such as real estate attorneys, home inspectors, and even movers.
In short, a buyer’s agent is meant to help you navigate your way to homeownership.
17. Do real estate agents charge fees?
Most real estate agents earn money on the real estate deal instead of an hourly rate. This is usually a percentage of the sales price of the home. Although the exact percentage varies, a typical fee is 5% to 6% of the final sale price of the home.
For example, on a home that sells for $200,000, a real estate agent charging a commission of 5% would amount to $10,000.
If you’re buying a home, you typically don’t have to pay real estate agent commission. Generally, the seller pays the full commission for both the services of their listing agent and the buyer’s agent.
18. Who should pay for a home inspection?
As the buyer, you pay for the inspection of a potential home yourself. An inspector accountable only to you will help ensure you’re getting a complete inspection and an honest opinion of the physical condition of the property.
Ask friends or family members if they have an inspector they can recommend. If you look online, check reviews and only choose an inspector you believe will give you an honest assessment. You may be able to negotiate with the seller or cancel the sale entirely if your home inspector finds that the property needs costly repairs.
19. Can a seller refuse to make repairs?
Depending on the repairs and the terms of the purchase contract, a seller may or may not agree to pay for repairs. Common repairs required after a home inspection are things such as foundation and structural defects, building code violations, and other safety issues. If an inspector finds such issues, the seller will likely be responsible for making the necessary repairs. In that case, the seller can either fix these problems or give the buyer a credit so they can pay for the repairs themselves.
According to the CFPB, “if your purchase contract is contingent on a satisfactory inspection, you have the right to cancel the sale without penalty if you are not satisfied with the results of the inspection.”
20. What happens at a real estate closing?
The closing process, or settlement, is the final step in buying a home. Closing is when you and all other parties in the mortgage loan transaction — real estate agents, attorneys, your title insurance company — sign the necessary documents to close the deal. At that time, you become legally responsible for the mortgage loan. For this reason, it’s important to carefully read and understand your loan documents. Make sure the loan agreement outlines the terms and conditions you agreed upon, and don’t sign any documents that contain errors or that you don’t understand.
21. How soon can you move in after you buy a house?
In some cases, possession of the property passes to the buyer at closing. In other instances, you may agree to give the seller a number of days after closing to vacate the property. The exact details should be outlined in the purchase contract between buyer and seller.
22. What should you do after you move in?
You should do several things when you move into your new home. Most importantly, you want to secure your home. This means changing all the locks and passcodes on security systems. You don’t want the previous homeowner to have the ability to enter your home.
Some other things you should do upon moving in include:
- Review the home warranty received by the previous owner, or consider buying a new one to cover your home’s major systems or appliances
- Connect the utilities, such as water, gas, and electricity
- Locate your circuit box and emergency shut-offs
- Do a thorough cleaning
- Check smoke and carbon monoxide detectors to make sure they're functioning properly
- Make a maintenance to-do list
- Repaint to make your house your home
23. Should you buy life insurance when you get a mortgage?
Your home is likely one of your biggest assets, and it’s also probably your largest financial responsibility. If you have a family and want to ensure they can remain in your home in the event of your death, look into the different types of life insurance. Typically, term life coverage is the most affordable option and is sufficient for most people.
The best life insurance companies offer multiple policy terms, typically ranging from 5 to 20 (or even 30) years. If you purchase term life coverage for at least the amount of your mortgage, your family can pay off the mortgage with the proceeds of your life insurance policy should you pass away during the policy’s term. If they don’t want to pay off the mortgage, your family will at least have the money to be able to continue living in your home. This can give you some much-needed peace of mind when you buy your first home.
First-time homebuyer questions: the final word
Buying a home is a major milestone for many people. As exciting as it is, the home buying process can feel complicated to navigate. As you’re preparing to buy a home, take the time to familiarize yourself with the process. This will allow you to avoid mistakes and setbacks, and it will help ensure you get the best deal possible.