First-Time Home Buyer? 5 Things You Should Know About Getting a Mortgage

by Maurie Backman | Updated July 19, 2021 - First published on April 10, 2021

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New to the mortgage application process? Here are a few key points to keep in mind.

Being a first-time home buyer can be intimidating. Not only do you need to navigate the house-hunting process, but you also need to find yourself a loan to finance that purchase. And if you don't know much about mortgages, you may have a hard time getting approved for a home loan. With that in mind, here are a few key pieces of information you should have if you'll be applying for a mortgage in the near term.

1. Your credit score matters -- a lot

Mortgage lenders generally require a minimum credit score of 620 for a conventional home loan. But that's just the minimum, and lenders can insist on a higher score -- and deny you a loan if you don't have one. Also, the higher your score, the better the interest rate you're apt to snag on your mortgage. So it pays to approach the application process with solid credit. And if you're not there yet, try paying off some debt or reviewing your credit report for errors to help bring that number up quickly. For more information, check out our guide to understanding your credit score.

2. Keep your existing debt to a minimum

Mortgage lenders will want to make sure you're not too overextended with your debt before loaning you even more money. To that end, they'll look at a measure called your debt-to-income ratio, which compares your monthly debt to your monthly income. The higher that ratio, the more of a problem it becomes, so it's a good idea to shake some debt before applying for a home loan. For example, if you have a large credit card balance hanging over your head, paying it off could make you a more viable loan candidate.

3. Income is a factor, too

If you earn $50,000 a year, you may qualify for a $150,000 mortgage -- but you'll probably be denied an $800,000 loan. When applying for a mortgage, your lender will verify your income (usually, by requesting copies of pay stubs) and use it to determine how much you can borrow. That's a good thing because you don't want to take out a higher loan than you can swing.

4. You may not need to put 20% down -- but it pays to do so

Though many lenders require a 20% home down payment when you close on your mortgage, some will accept a lower amount at closing. Some lenders will even let you buy a house with no down payment.

But putting down 20% is smart for two reasons. First, it'll help you build equity in your home faster (equity is the portion of your home you own outright, and it's something you can borrow against as needed). Secondly, if you don't make a 20% down payment, you'll face private mortgage insurance, which is a costly premium you pay on top of your regular mortgage payment.

5. Shopping around is your best bet

Mortgage lenders don't operate as a cohesive unit -- each one operates independently. As such, you may land in a scenario where one lender denies you a mortgage and another approves you, or where one lender comes back with a much better mortgage interest rate on your loan than another. It's for this reason that shopping around for a mortgage is a good bet. So try to get offers from at least three or four lenders before making a decision. You can do that work on your own or outsource it to a mortgage broker, who can gather offers for you.

Applying for your first mortgage can be scary -- but it doesn't have to be. Now that you know what factors go into mortgage approval and how to approach the process strategically, you're in a better position to not only qualify for a home loan, but to also snag a great offer that makes homeownership more affordable.

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