10 Questions First-Time Homebuyers Ask About Mortgages

Buying your first home is an exciting step but it’s also one that we receive a lot of questions about, such as how to get a mortgage and what first-time home buyers need to know. We want to make your homebuying journey as successful and stress-free as possible, so we put together the 10 most common first-time homebuyer mortgage questions and answers so you can shop confidently and avoid surprises.

Mortgage Timeline

1. How Much House Can I Afford?

Qualifying for a mortgage involves a complex formula involving the debt-to-income ratio, your credit report and score, as well as other factors.

Your credit score has a significant impact on your ability to obtain a mortgage and the amount of interest you’ll have to pay. Credit reports are determined by the nation’s three credit reporting bureaus: Experian, Equifax, and TransUnion. You can check your credit report for free every week at AnnualCreditReport.com. This service was previously available only once a year, but you can now check it weekly.

Look at each credit report for possible mistakes or signs of fraud. If you do see something that needs to be corrected, contact the bureau that lists the information. Once you know your credit rating, you can take steps to improve your credit score, such as paying down debts and paying your bills on time.

Your debt-to-income ratio (DTI) is calculated by your pretax monthly income divided by all your monthly debt payments. This would include the mortgage you’re applying for, plus your credit card balances and any recurring payments such as car loans or child support. It can be hard to crunch these numbers, so we offer online financial calculators that you can use to estimate your mortgage costs. Of course, you could also sign up for a free consultation with one of our lenders to go over this information in detail.

The higher your credit score and the lower your DTI ratio, the more likely you are to qualify for a mortgage. For conventional mortgages, a DTI of 45% or less and a credit score of 660 or higher are typically required. Of course, there are other considerations such as collateral and employment history. There are also government-backed mortgages that are less stringent in their requirements, which we’ll discuss later.

2. What’s The Difference Between Prequalification and Preapproval?

Prequalification is like an informal estimate of how much you might be able to borrow from a lender. The lender doesn’t always perform a “hard pull” of your credit report, so it wouldn’t impact your credit score.

Preapproval offers a more accurate estimate of what you might borrow, with a detailed look at your finances and your credit report, which could temporarily hurt your credit score. Your lender will issue a prequalification letter that states how much you might borrow. These letters are usually good for 60 to 90 days.

Both options offer estimates of how much you could borrow, though neither one is a guarantee. You might use pre-qualification to get an idea of what you could buy, as you do an informal search for a home. When you’re ready to commit to the homebuying process, a preapproval letter lets sellers and realtors know that you’re serious about buying a home. Some realtors won’t show you a property without a preapproval letter.

PreApproval Letters

3. How Much Do I Need for a Down Payment?

For conventionally backed mortgages, a down payment of 20% of the purchase price of the home is customary. A down payment of less than 20% would require private mortgage insurance (PMI), which is added to the cost of your monthly mortgage payments. Your PMI cost may vary based on the loan amount, DTI and LTV.. Some government-backed loans don’t require a down payment, and FVSBank offers low down payment options for first-time homebuyers.

4. What Types of Mortgage Loans Are Available?

At FVSBank, we offer both fixed-rate mortgages and adjustable-rate mortgages (ARMs). A fixed-rate mortgage offers predictable monthly payments that remain the same over the life of the loan. ARMs offer a lower introductory rate for a few years and then fluctuate depending on market conditions. Of course, we also manage government-backed loans and can help you through the entire process. These include:

Wisconsin Housing and Economic Development Authority (WHEDA) Loans

The Wisconsin Housing and Economic Development Authority (WHEDA) offers home mortgages that can help first-time homebuyers secure affordable financing with low down payments and reduced mortgage insurance. They also have flexible credit guidelines, which make them easier for first-time homebuyers to obtain.

If you’re a first-time homebuyer or haven’t owned a home in the last three years, you could be eligible for a WHEDA loan.

Pre-purchase Home Buyer Education (HBE) is required for first-time homebuyers. Qualified borrowers can often claim up to 40% of their loan interest as a tax credit (consult a tax advisor)

There are two types of WHEDA mortgages available, and both offer fixed 30-year terms:

WHEDA Advantage Conventional

  • Requires a credit score of at least 620.
  • Can be used to purchase a single-family residence, a condominium, a 2-to-4-unit building, or a manufactured home.
  • Buying a 2-to-4-unit building requires a down payment of at least 3%, plus six-month cash reserves. Other properties require no down payment.

WHEDA Advantage

  • Backed by the Federal Housing Administration (FHA).
  • Requires a credit score of at least 640.
  • Can be used to purchase a single-family home, a two-unit building, or HUD-approved condominiums.
  • Down payment of 3.5% required for all property types, but WHEDA down payment assistance is available.

5. What’s Included in My Monthly Mortgage Payment?

Here are a few key terms that you will need to know when applying for a mortgage. Some of them are included in your monthly mortgage payments:

  • The principal: How much you borrowed.
  • Interest: A percentage that’s added to the outstanding balance of your mortgage every month, just like a credit card balance.
  • Property Taxes: If you escrow, these are usually paid by your lender and added to your monthly mortgage payments. It can change based on local tax rates and your property’s assessed value.
  • Escrow Account: A bank account that’s set up to cover the cost of property taxes and homeowners’ insurance. A portion of your monthly mortgage payments are placed in your escrow account to cover these costs.
  • Private Mortgage Insurance (PMI): A fee added to your mortgage payments for conventional mortgages with down payments of less than 20% of the purchase price.
Private Mortgage Insurance

6. What’s The Mortgage Process Timeline Like?

Securing a mortgage to buy a home usually takes from 30 to 45 days, although there can be delays in setting up appraisals, inspections, and waiting for the reports. There could also be paperwork delays if your lender requires more documentation regarding your employment, income, and other issues.

Get Preapproved

Meet with a lender and fill out the paperwork. You’ll need copies of your W-2 forms and tax returns for the past three years, your most recent pay stubs, bank statements for the last two to three months, and personal identification such as a driver’s license. If your application is approved, you’ll receive a letter of preapproval that’s typically valid for 60 to 90 days and indicates how much you can borrow. This process can take one to five business days.

Look for a Home

How long your property search takes may depend on how familiar you are with an area, whether you’ve already been looking, and the state of your local real estate market. Estimates range from one to 10 weeks.

Make an Offer and Negotiate

Depending on your offer and how hot the housing market is, the seller might decline or want to negotiate. There could also be other buyers interested in the home that you might have to bid against.

Start the Closing Process

Once a seller accepts your bid, you formally apply for your mortgage. This process can take a month or two. Your lender will hire an appraiser to inspect the home and determine its market value.

Have the Property Inspected

When bidding on a home, many buyers include a contingency that requires the property to be approved by a certified home inspector, which is not the same as an appraisal and is paid for out of your pocket. The inspector will look for any structural or electrical issues that could compromise the integrity or safety of the home.

Inspections are required for government-backed loans, but usually aren’t required for conventional mortgages. Many lenders do require a wood destroying organisms report (WDO), which looks for issues such as termites and mold.

You may have a week to 10 days to have the property inspected. If any issues arise, you may need to renegotiate your offer, such as having the seller fix the issue or lower the price. If the home relies on well water, many buyers will require the well to be tested.

Have a Title Search Done

Before buying a home, an attorney or title company will dig through public records to verify who owns the property and check that there aren’t any pending claims or liens against it.

Close on the Property

When you, the seller, and your lender are all on board, you’ll receive paperwork from your lender that outlines the terms of the loan, what you’ll pay, and you’ll finally close.

7. What Credit Score Do I Need to Get a Mortgage?

Your credit score has a direct impact on your ability to obtain a mortgage and the interest rate. For conventional loans, a credit score of at least 620 is typically required. Of course, a higher credit score would lead to better terms.

These are the minimum credit scores typically required for mortgages:

  • WHEDA loans: 620 to 640.
  • FHA-backed mortgages: 580 for a down payment of 3.5% or 500 for a down payment of at least 10%.

8. Can I Use Gift Money for My Down Payment?

If someone offers to help you with your down payment, you’ll need to inform your lender and provide documentation, including a letter from this person that confirms the amount they gave you and that you’re not required to repay the money. There are gift restrictions based on the type of loan you have:

  • Conventional mortgages: Donors must be family members or romantic partners.

9. How Do I Choose the Right Lender?

There are many ways to choose a lender, and we recommend looking beyond the interest rate alone. We suggest choosing a bank that’s known for customer service and understands the local housing market and the economy. At FVSBank, we make all our lending decisions locally, so you won’t have to wait for someone in a high-rise office tower somewhere to grant their approval.

10. What Happens at Closing?

When you sign your mortgage documents and pay your closing fees, you’ll turn the process over to a closing agent, also known as a settlement agent or an escrow officer. This person will handle the legal paperwork and transfer of funds, which is usually done by a cashier’s check. You’ll do a final walk-through of the property to look for any signs of new damage and to make sure that any repairs were made, in accordance with the sale contract. That’s when you sign the final sales contract and receive the keys to your new home. Just make sure you have your funds ready to be transferred and have all your documents with you, such as your ID.

We Can Help You Through the Entire Process

Getting a mortgage doesn’t have to be scary, especially if you work with the right lender. If you have any questions, please stop by one of our branches in Fond du Lac, Oshkosh, or Waupun. You could also contact one of our mortgage lending officers to schedule a mortgage consultation where you can discuss your options and get prequalified.