First-Time Homebuyer Guide to Mortgages

Buying your first home doesn’t have to be hard. Our First-Time Homebuyer Guide to Mortgages demystifies the process and will get you ready to find your dream home.

Found your dream house? Here are some great reasons to work with PennyMac:

  • Low, everyday rates
  • FHA, VA and conventional loan options available
  • 4th largest lender in the country
  • Highly rated for providing exceptional customer service

Are You Ready to Buy a Home?

Purchasing a first home is a major milestone in life—but the process of obtaining a mortgage can feel a little bit overwhelming. The various paperwork, requirements, and fees alone can be complex and confusing, particularly the first time you deal with them.

The first step is to determine you are ready, both financially and mentally, to take on the responsibility of homeownership. Once you’re confident in that regard, the next steps are to examine and evaluate each of the loan options available so you’re sure to get the best rates and terms possible. With a little bit of patience, you’ll be well on your way to a happy home buying experience. To begin, let’s take a look at how to determine if you’re ready for homeownership.

Are You Ready to Buy a Home?

Gauge Your Homeownership Readiness

Despite the fun of house hunting, it’s important to consider whether you are actually ready to own a home. Needless to say, owning a home is a long-term investment. Though you’re probably aware that over time, homeownership makes more sense than renting, that doesn’t always mean it’s appropriate to your unique situation.

Besides being financially prepared, housing experts suggest you should plan to stay in your home for at least five years—that way you have a chance to start paying down your principal balance and reap the financial benefits of homeownership (such as earning home equity).

When deciding if you’re ready for homeownership, there are a few questions you should ask yourself:

  1. Am I ready to commit to living in a single location for at least five years?
  2. Am I up to the tasks of regular house and property maintenance?
  3. Do I plan to maintain or grow my income level for the foreseeable future?
  4. If you answered “yes” to each of the questions above, then you can move on to this final question to be sure you’re ready for owning a home:

  5. Am I financially ready for the responsibility of a mortgage, including monthly payments, insurance and taxes?

This is a complicated question, and one you should carefully consider before deciding to apply for a loan. Some of the major financial factors involved in obtaining a mortgage for the first time include:

  • Credit Score
  • Available funds for a down payment and the closing costs for your loan
  • Pre-qualification / Pre-approval eligibility
  • Proof of income
  • Affordability of mortgage payment
  • Types of mortgages you may qualify for

Let’s take a look at each item in turn.

How Your Credit Score Affects a Mortgage

One of the biggest mistakes first-time borrowers make is failing to understand their credit standing. Before applying for a mortgage, it’s vital to thoroughly review your credit report from one of the three major credit bureaus, and resolve any errors that may appear. You're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, according to the FTC.

A stronger credit history will generally get you more favorable terms, and a lower interest rate on your mortgage. The general best practice is for future homebuyers to make timely payments on bills, credit cards and loans for at least one year and up to three years before diving into a mortgage.

Depending on the lender, the minimum credit score requirements for loan qualification are often between 620 and 640.

How Your Credit Score Affects a Mortgage
Down Payment Requirements, Closing Costs and Fees

Down Payment Requirements, Closing Costs and Fees

One of the biggest roadblocks people see to homeownership is the requirement for a down payment—but that shouldn’t prevent you from seeking a mortgage. While 20% is frequently quoted as a standard down-payment, there are several programs available that allow lower down payments-- as little as 3.5% for FHA loans, 3% for some conventional programs, or even 0% for qualifying service-members through the VA’s home loan program. Speak with a PennyMac loan expert to see if you qualify for these loan programs.

In addition to your down payment, you will be responsible for the costs and fees due at closing. While this number depends on your home loan’s rate and terms, experts estimate that closing costs typically range from 2-5% of the total mortgage. So, if you take out a mortgage for $150,000 you’ll have to pay roughly $3,700 in closing fees, although they could be more if you pay points to buy down your rate. In some cases, you can roll your closing costs into the final loan amount to reduce the cash needed at closing.

How Large of a Mortgage Can I Afford?

Your total loan amount is largely dependent on your current financial status, including your gross income, existing debt, and the type of loan program you select. As a general rule, most loan programs require that your total mortgage payment (including your property taxes and insurance, and, if applicable, mortgage insurance and/or monthly association dues) and existing monthly debt obligations comprise no more than 45%-55% of your gross monthly income. A PennyMac mortgage expert will work closely with you to determine a housing price that you can afford.

Tip: PennyMac offers calculators to help you determine how much home you can afford and get estimates of your monthly payment in different scenarios.
How Large of a Mortgage Can I Afford?
Get Pre-Qualified or Pre-Approved for a Mortgage

Get Pre-Qualified or Pre-Approved for a Mortgage

Once you feel secure about your financial readiness, the next step is to get pre-approved or pre-qualified for a mortgage loan. You can begin the pre-qualification process online or speak with a lender to get a customized quote. This will show you how much you might be able to afford and give you an estimate of your monthly payments.

However, it’s important to note that there is a difference between pre-qualification and pre-approval. Getting pre-qualified is a fairly simple process that requires credit verification and, in most cases, income verification but does not require the full underwriting process. A pre-approval, on the other hand, includes full underwriting in addition to credit and income verification.

In both cases, you will get an approval form to present to home sellers as good faith.

Mortgage Application Documentation Requirements

Your lender will want to ensure that you can afford the loan you’re applying for. That being said, lenders say first-time homebuyers often delay approval by failing to gather the required financial documents ahead of applying for the mortgage. To prepare for the application process, be sure to obtain the following documents:

  • A full month of paystubs
  • Tax returns, W-2s, and/or 1099s
  • A list of current debts, such as car loans, etc.
  • Your current bank statements
Mortgage Application Documentation Requirements

Conventional Mortgages

While a fixed-rate mortgage will give you a rate that never changes, an adjustable-rate mortgage will offer a rate for the initial period and then adjust to a variable rate that changes annually.

Rates & More Info >
  • Great low rates, either for the life of the loan (fixed) or the initial term (ARM)
  • No mortgage insurance with 20% down
  • Flexibility for young homeowners to decide what term makes the most sense for their future plans

FHA Loans

These mortgages are insured by the government and offer more flexible lending guidelines than conventional loans.

Rates & More Info >
  • Low down payment requirements
  • Allows a broader range of income, debt, and credit history than conventional mortgages
  • Access to streamline refinancing program

VA Loans

These mortgages are reserved for US service members and their spouses.

Rates & More Info >
  • No down payment required
  • No monthly mortgage insurance payment
  • Typically lower interest rates than conventional loans
  • Access to VA Streamline program

FHA vs. Conventional Loans

When you’re purchasing a home for the first time, it can be difficult to understand the differences between an FHA loan and a conventional mortgage. Let’s take a closer look and compare two of the most common mortgages on the market:

FHA

An FHA loan is a mortgage insured by the Federal Housing Administration.

FHA loans are a good option for first-time borrowers who don’t have a lot of funds available for a down payment or who need a loan with more flexible income requirements.

The FHA offers flexible lending standards, and down payments as low as 3.5%, making this loan an attractive option for first-time homebuyers.

An FHA loan requires two types of mortgage insurance: an upfront fee to be paid at closing and a monthly premium. In addition, you’ll be responsible for closing costs and fees.

Conventional

A conventional mortgage is a home loan that conforms to a set of guidelines set by Freddie Mac and Fannie Mae.

Conventional loans are geared toward homebuyers with larger down payments and good-to-excellent credit.

These loans may have shorter approval times. In some cases, mortgage insurance isn’t required.

Down payments on conventional loans are typically 3-20%. In addition, you’ll be responsible for closing costs and fees.

Frequently Asked First-time Homebuyer Questions

What Is Mortgage Insurance and How Does It Affect My Monthly Payment?

Conventional first-time homebuyers are required to pay mortgage insurance if their down payment is less than 20% of the property’s value. Mortgage insurance can be charged in the form of either a single up-front charge at the funding of your loan, or a monthly premium that you make with your monthly payment. The mortgage insurance covers risks to Fannie Mae or Freddie Mac if you happen to default on your loan. With a few exceptions, mortgage insurance is cancelled once you reach 78% equity in your home. FHA first-time homebuyers always pay an up-front charge and an annual premium that you make with your mortgage payment. PennyMac Loan experts can help you figure out exactly how insurance affects your monthly payments.

What Is Mortgage Insurance and How Does It Affect My Monthly Payment?
Mortgage Insurance vs. Homeowners Insurance: What’s the Difference?

Mortgage Insurance vs. Homeowners Insurance: What’s the Difference?

Though these types of insurance sound related (and are often confused), there is actually a pretty big difference between the two.

Homeowners pay mortgage insurance to cover risks to Fannie Mae or Freddie Mac in the event that you default on your loan. This is generally something that your lender will arrange so you won’t have to shop for it. This generally applies when you make a down payment of less than 20% on conventional loans.

Homeowners insurance, on the other hand, prevents you (the homeowner) from absorbing total financial risk in the case of losses or physical damage to your home. You may choose to get homeowners insurance from a number of different vendors and either pay them directly or through escrow.

I’m Ready to Apply for My First Loan. Why Should I Choose PennyMac?

So, you’ve done your research and you’re confident in taking the next step to buying a home: applying for the loan. Now you must choose a lender.

When you’re a first-time homebuyer, you want a lender you can trust to help you through the process. As a top national mortgage lender, PennyMac’s licensed loan officers are specifically trained to help entry-level home buyers move through the mortgage process and have a pleasant home buying experience. In fact, we are dedicated to fulfilling the dream of homeownership for everyone interested in taking the next step on a new property. We’re working every day to improve the experience of finding the right home loan for your unique needs and offering competitive rates on a wide range of products. Interested to learn more about what PennyMac can do for you? Get your own customized quote today.

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