Mortgage 101: Basics for First Time Homebuyers

Mortgage 101: Basics for First Time Homebuyers

Buying a new home is an exciting and life-changing decision. No doubt that you have been dreaming of it for a long time: the perfect location, gorgeous design style, and must-have features have probably already captured your heart.

However, the process of applying for and securing a mortgage can be confusing and overwhelming. With different types of mortgages and various qualification factors, it’s essential to understand the process before committing to homeownership. We’ll explore everything you need to know about mortgages to help you navigate this important step in your homebuying journey.

The different types of mortgages

Before we dive into anything else, it’s helpful to know that there are three main types of mortgages: fixed-rate, adjustable-rate, and jumbo.

Fixed-rate: A fixed-rate mortgage is a type of mortgage with a set interest rate that doesn’t fluctuate throughout the loan’s life. Fixed-rate mortgages typically have a loan term of 15 or 30 years. These are the most common types of loans homebuyers use to finance their home purchase. The main benefit of fixed-rate mortgages is it’s protected against market fluctuations so your monthly payment stays stable throughout the life of the loan, making budgeting for mortgage payments more manageable.

Adjustable-rate: Adjustable-rate mortgages (ARMs) have an interest rate that fluctuates based on market conditions. An ARM usually has a lower initial interest rate than fixed-rate mortgages, but the rate can fluctuate after a fixed period. While lower interest rates may allow you to qualify for a larger loan, your monthly mortgage payment can increase once the initial fixed-rate period ends. Since ARMs are affected by market conditions, uncertainty about future interest rates can create stress for some borrowers.

Jumbo mortgage: Jumbo mortgages are for borrowers looking to finance a home above the conforming loan limits set by Fannie Mae and Freddie Mac. These loans typically have stricter qualification requirements and higher interest rates. They allow you to finance a more expensive home without draining your savings and can offer greater flexibility for high-income borrowers. However, jumbo loans typically come with higher interest rates and closing costs, plus stricter credit and income requirements can make qualification more difficult.

Factors That Affect Mortgage Rates

When it comes to mortgages, your interest rate is one of the most important things to consider. Understanding the factors that affect rates can help you make informed decisions. Your credit score, down payment, loan term, and type of mortgage are just some of the factors that can impact your interest rate.

Credit score: Your credit score is one of the most critical factors when it comes to mortgage qualification. Your credit score reflects your ability to manage debt and your willingness to repay loans. Most lenders require a credit score of at least 620, and the higher your score, the better interest rate you’re likely to receive.

Income level: Your income level is another essential factor when it comes to mortgage qualification. Lenders will consider your income level when determining your ability to repay the loan. The higher your income level, the more likely you’ll be able to afford a more expensive home. 

Other qualifying factors: In addition to credit score and income level, lenders consider other factors when determining mortgage qualification, including your debt-to-income ratio, employment history, and cash reserves.

Your debt-to-income ratio compares your monthly debt payments to your monthly income. A lower debt-to-income ratio increases your likelihood of qualifying for a mortgage. Lenders prefer to see a stable employment history of at least two years. Lenders also like to see that you have enough cash reserves to cover at least two months of mortgage payments.

Down payment and mortgage insurance

Most lenders require homebuyers to make a down payment when taking out a mortgage. A down payment is a percentage of the home’s purchase price that you pay upfront. The down payment can range from 3.5% to 20% of the total home price. It’s important to note that the larger your down payment, the lower your monthly payment.

If your down payment is less than 20%, your mortgage lender may require you to pay for mortgage insurance. Mortgage insurance is an insurance policy that protects your lender in case you default on your loan.

Private Mortgage Insurance (PMI) is the most common type of mortgage insurance and is required for conventional loans when you put less than 20% down on your home purchase. PMI is an additional monthly fee added to your mortgage payment.

Mortgage pre-qualification and pre-approval

Before you start house hunting, it’s a good idea to get pre-qualified or pre-approved for a mortgage. Pre-qualification is a simple process that gives you an estimate of how much you can afford. Pre-approval is a more formal process that requires documentation like income and employment verification. Pre-approval provides a more accurate idea of your borrowing power that you can use as your budget range.

Closing on your mortgage

Closing is the final step in the mortgage process, and it’s when the property legally becomes yours. This process can be overwhelming, but it doesn’t have to be. You’ll sign various documents and pay closing costs, which can include lender fees, appraisal fees, title search fees, and legal fees. The typical closing costs on a mortgage loan can range from 2-5% of the total home purchase price. For a $600,000 home, that can mean up to $30,000 in closing costs. While some lenders offer programs to cover these costs or allow you to roll them into the mortgage itself, it’s important to budget for these costs. Once everything is signed and paid, you’re a homeowner!

Mortgages and the home buying process can be complex, but with the help of the right resources and understanding basic mortgage concepts, you can make informed decisions. It’s crucial to do your due diligence and educate yourself on the process before committing to any mortgage. Our preferred lender, Great Western Home Loans, will be able to answer any questions you have.

New construction homes from Williams Homes

Ready to make the jump into the market and find your new home? Williams Homes can help. We build new home communities throughout Northern and Southern California, Idaho, Montana, and Texas in desirable areas you’ll love to live. Learn more about our available quick move-in homes and new home communities at