The decision to purchase your first home marks a significant milestone in life. However, in recent years, surging prices, higher mortgage rates, and a low supply of available stock have caused headaches for many first-time homebuyers. Despite the difficulties, buyer optimism is on the rise.

According to NerdWallet, more than 1 in 10 (12%) of Americans say they plan to purchase a home in the next 12 months. While the process of getting a mortgage can be stressful, knowing the basics can lighten the load.

How to qualify for a mortgage

Owning a home is a major financial responsibility. Therefore, it’s essential to ensure you are financially prepared for it beyond the cost of purchasing or securing financing. Start by conducting a financial check-up. Review your credit report and credit score. (Tip: You can check your credit score for free at Having a higher credit score can help you secure a better mortgage rate, so focus on financial areas you can strengthen before buying.

Next, figure out what you can afford by determining your debt-to-income ratio (DTI). Add all your monthly debt amounts and divide that number by your gross monthly income (which is your income pre-tax). The lower your number, the more room in your budget to take on a mortgage and the added expense of home maintenance and upkeep.

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Once you’ve established a firm grasp on your financial situation, build up your savings. To set your savings goal for purchasing a home, consider the down payment and other associated costs, such as home inspection, appraisal fees, and closing costs. Additionally, it is important to factor in the cost of interest over the life of the mortgage and save for extra expenses, including home maintenance, HOA fees improvements, and repairs.

Identify the right lender and mortgage option

Before you wade into the sea of mortgage options, you may want to consult the experts. To help you understand your financial foundation and mortgage options, enlist help from a financial professional and mortgage loan consultant. They can help you figure out the best budget and savings plan to purchase your ideal home, as well as helping you obtain pre-approval for a home loan, narrow down your loan options, and estimate your closing costs and payments.

Types of mortgages

  • Conventional – A traditional path to homeownership requiring at least a 5% down payment, although some lenders offer programs with as little as 3% down.
  • FHA/non-conventional – Ideal for those with lower credit scores, light credit history or smaller down payments.
  • Veterans Affairs (V.A.) This program is tailored for American veterans or their spouses and offers home financing without a down payment.
  • United States Department of Agriculture (USDA) – Looking for a home or land in rural areas? This loan could offer 100% financing if the property’s location fits the bill.

Fixed vs. adjustable rate mortgages

Fixed-rate mortgages Adjustable-rate mortgages (ARM)
These mortgages lock in your interest rate and keep your payments steady throughout your financing term, regardless of market fluctuations. Typically starts the loan term with lower rates (and thus lower payments) but be prepared for potential increases after the initial fixed-rate period.
Benefit: Consistent payment amounts that allow for stable budgeting over the full term of your mortgage. Benefit: Take advantage of a lower interest rate in the early years of homeownership.
Consideration: Current interest rates for mortgages are the highest they’ve been in decades. Consideration: Watch for limits on the interest rate once the fixed-rate period has ended and be sure you understand the maximum possible mortgage payment.

Remember, the right mortgage loan should align with your financial goals and financial health. For instance, if you are unlikely to increase your income in the near future, a fixed-rate mortgage can help by providing more stable monthly payment amounts.

Be sure to shop around and compare lenders to find the home loan that’s right for you. Keep in mind that each lender will set different terms and conditions. Some lenders may offer lower rates for existing customers, or special programs for new customers.

Your lender can help you find the perfect home loan for your situation, and you should view them as a professional to collaborate with rather than just transaction support. Before meeting with them, know your down payment amount, desired loan size, and whether you prefer a quick payoff with higher or lower payments over time.

To show potential sellers that you’re serious about buying a home, secure a mortgage pre-qualification or pre-approval letter from a lender before attending open houses, home viewings or other buyer events.

  • Pre-qualification is a quick process done over the phone, online, or in person.
  • A pre-approval requires more information and verification of your financial history.

Remember, your pre-qualification or pre-approval letter does not guarantee you’ll get a mortgage, but once you have it, you can begin house hunting with more credibility.

Closing the deal on your new home

Once you’ve found the home you want to purchase, your real estate agent can help you negotiate the best deal. After your offer is accepted, you’ll need to complete your mortgage application. After you submit your loan application, your lender will assess the risks and determine the final loan amount, interest rate, and terms through the underwriting process. Hopefully, at this point in the process, you are already on close terms with your lender and the final deal details should be a breeze.

Your lender and an experienced real estate agent can help you navigate the rest of the buying process from inspection and appraisal to final walk-throughs and move-in day.

Review the homebuying process and learn about the benefits of owning a home through the Owning a Home playlist on the UMB Financial Education CenterFor more information, visit our mortgage calculator and learn what you can expect from a home loan.

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