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Buying a Home for the First Time? 6 Important Things to Understand About Mortgages

Ian Mutuli
Updated on

Two things are true about mortgages: they are necessary for many homebuyers - and they are very complicated! If you have found yourself getting lost in the many terms, abbreviations, and options, you are not alone.

But instead of looking at mortgages as a necessary evil to afford your dream home, it is time to consider them for what they are: a powerful tool to achieve your life goals! And, with the right foundational knowledge, you can easily navigate the process of securing the best mortgage. Start here!

Getting Pre-Approved Can Help You Secure Your Dream Home

While you might be trying to keep paperwork to a minimum, there are some steps of securing a mortgage that cannot be avoided.

One of these is the preapproval process. Unlike a prequalification - which is a recommended but not necessary soft credit check - a preapproval is an authoritative hard credit check required by most mortgage lenders.

Once the lender has verified your financial information and creditworthiness, you’ll also receive a precise estimation of how much you can borrow and what interest rates to expect. In turn, this can make a difference in your house hunting project, even if you are not using the services of a realtor.

Conventional, USDA, FHA, and VA Loans: Know Your Mortgage Options

When it comes down to finding the right mortgage for your needs, you’ll need to be prepared to choose among a myriad of options - and the more you know about them, the more likely you’ll be to choose wisely.

Firstly, it’s important to understand the difference between conforming and non-conforming loans. The firsts are home loans that meet the government-sponsored size guidelines set by mortgage associations Fannie Mae and Freddie Mac, which, for 2022 is set at $647,200 - or $970,800 for high-cost areas.

On the other hand, non-conforming loans don’t meet these standards and might be accessible by borrowers with a poor financial history.

Most lenders will also offer a variety of loan types, including:

  • Conventional mortgages - these loans follow conforming guidelines but are not government-insured.
  • VA loans - these are conforming or non-conforming loans guaranteed by the U.S. Department of Veterans Affairs, which protects the lender in the case of missed payments.
  • FHA loans - these loans can be conforming or non-conforming, are insured by the Federal Housing Administration, and might be suitable for borrowers with lower credit scores.
  • USDA mortgages - these loans are issued by the United States Department of Agriculture and can cover 100% of your needed amount, but are only suitable for rural properties in specific regions.
  • Jumbo - Jumbo loans are non-conforming loans for greater amounts than the ones set by enterprises Freddie Mac and Fannie Mae and come without mortgage insurance.

Adjustable vs Fixed-Rate Mortgages: Which One Is for You?

It is true that 90% of buyers opt for fixed-rate mortgages - but there is no obvious answer to know which one is better in your case.

Fixed-rate mortgages offer higher but fixed rates for the life of the mortgage, which might be 15 or 30 years. Oppositely, adjustable-rate mortgages (ARM) provide lower interest rates to start with, but they will change after 5 or 7 years, depending on your mortgage terms and according to the market at that point in time.

The best mortgage product for you will depend on your risk tolerance and current interest rates.

Should You Choose a 30-Year, 20-Year, or 15-Year Fixed Mortgage?

When choosing the length of your mortgage, you should do so wisely. If you can afford larger monthly payments, shortening the term of your mortgage can help you pay off your home earlier, avoid higher interest rates, and keep costs to a minimum.

However, before choosing these terms, you should carefully review how much you can afford to pay per month and how your financial situation might change over time. Some options, such as SoFi home loans, allow you to pick among a range of lengths to find the right terms for your budget and financial goals.

You Don’t Need a 20% Down Payment – But It Can Help!

In 2021, a record 30% of buyers purchased their homes in cash. Luckily, you don’t have to save so much to afford the property of your dreams. In fact, some insured and government loans are accessible even with a 0% down payment. And, if you have an above-average credit score, you might only need a deposit of 3-3.5%.

Hitting the 20% down payment mark might not be as important as it used to be. However, the lower your initial deposit is, the larger your needed loan will be and the more interest you’ll pay.

Plus, you might need to pay private mortgage insurance (PMI) if your down payment is lower than 20%. So, consider working towards this goal before applying for a mortgage.

Your Credit Score and Financial Situation Matter

Before offering a preapproved loan amount, lenders will run a hard credit check. Your financial situation, job status, and creditworthiness will impact the interest rates they’ll be able to offer you, as well as the amount you can borrow and the mortgage options offered. 

So, it might be worth taking some time to find job stability, clean up your credit history, and build a better credit score before applying for a mortgage. While this might delay your house-buying plans by a few months, it can improve your financial situation for the length of your home loan - which can be up to 30 years!

Consult a Mortgage Expert

Whether your eyes are already set on the perfect family home or you aren’t sure about the kind of property that would work for your lifestyle, getting a mortgage is an important part of buying a house - and the most complicated one! If you don’t feel confident walking into this world alone, consider partnering with a mortgage expert or broker.

Ian Mutuli

About the author

Ian Mutuli

Founder and Managing Editor of Archute. He is also a graduate architect from The University of Nairobi, Kenya.