What Should I Know Before I Take Out My First Mortgage?

“Historic lows.”

These two words—referring to the interest rates on a 30-year mortgage—have spurred many people to embark on their first home-buying experience. If you’re one of them, congrats! Now let’s get down to work: The process of taking out a mortgage is complex, and missteps could saddle you with extra payments or leave you drowning in red tape.

Not to worry—we’ve got your back. Here’s how to make your first mortgage happen.

How Much Mortgage Can I Afford?
This may be your first question—and it’s a big one: Getting a handle on costs is one of the hardest parts of this process. The rule of thumb is to spend no more than 30% of your gross income on housing (that goes for owning and renting). But assess your own situation. If you’re carrying debt, you may want to keep that number below 30%; those with no debt may be willing and able to go a bit higher.

While your mortgage’s down payment will be the most expensive part of the equation, homes also come with a lot of costs above and beyond the price itself. It’s important to factor in everything in the list below to get a more complete look at costs. (It may also be helpful to use a home loan calculator.)

What Is a Down Payment?
You’ve probably heard that a down payment should be 20% of the purchase price. But that’s just a guideline: You don’t want to deplete all your savings just to hit this number. In fact, the median down payment on a home is 12%, according to the National Association of Realtors, and 6% for first-time buyers.

Some lenders will allow you to pay less than 20%, but this comes with an important caveat: Because the bank is taking on more of the cost, the bankers will want extra protection from default. That extra protection is called principal mortgage insurance (PMI), and it could add hundreds of dollars to your mortgage payment every month.
 
What Are Closing Costs? 
Fees, fees, fees: Closing on a home is full of them. The good news is that some can be negotiable; still, set aside 2%–5% of the purchase price for closing costs. (On a $250,000 home for example, that’s between $5,000 and $12,500.) These costs can include (for starters) appraisal fees, a home inspection fee, mortgage application and attorney fees, title fees and any upfront fees for property tax. Some of these fees can be rolled into your mortgage, and some could be covered by the sellers, so make sure you discuss your options with your realtor and mortgage broker.
 
What Other Costs Should I Think About When Buying a House?
Are there any big things that you want to change right away, like installing a backyard fence or updating the kitchen appliances? It’s never too early to start figuring out home improvement costs.

And don’t forget about moving costs! Call up some moving companies and get an idea of how much they’ll charge based on the distance you’re moving and the amount of stuff you have.

Besides those, remember that there will be ongoing fees and expenses for any home. These costs come in addition to your mortgage payment, and they’re not going away, so include them in your expense tally. They include:

○    Property tax. Several factors go into determining what your property tax will be, but you should be able find out the amount on the property listing or through the county’s website. And remember that taxes can change depending on your home’s assessed value or changes the government makes.

○    Homeowner association dues. An apartment building or neighborhood may have an HOA, and you’ll be required to join; the fees go toward things like maintenance or management.

○    Homeowners insurance. Get a couple estimates on what it will cost to safeguard your stuff and give you liability protection.

○    Maintenance and repairs. Unlike with a rental, everything from cutting the grass to repairing the dishwasher is your responsibility. These costs can run higher for older homes, where things are more likely to break down.
 
Does Credit Matter for a Mortgage?
No question: Banks would prefer to have mortgage clients with strong credit, so before applying for a mortgage, you’ll want to check and strengthen your credit. Start by getting your credit report from the three credit bureaus: Equifax, Experian and TransUnion.

What should your score be? There’s no hard and fast rule. As of November 2020, the median FICO score for purchase loans was 745—of course, since that’s the median, a lower score won’t necessarily exclude you. Just work on paying down or paying off any debts you have; some banks may require you to do so in order to approve your mortgage.
 
How Can I Prepare for a Mortgage?
Here’s an important thing to keep in mind about today’s housing market: It’s competitive. If you don’t have your paperwork and financing lined up when you find the house of your dreams, you may lose out to someone else who’s ready to move forward immediately. Here’s where to begin.

●    Find a lender. Not all lenders offer the same rates and fees, so look around! A tiny difference in the interest rate may not seem like a big deal, but it can add tens of thousands of dollars to your interest payments over the course of a 30-year mortgage.

●    Look into assistance programs. Get a helping hand in landing a house: Check out the first-time home-buying programs that states offer, as well as FHA or VA loans, if you qualify. Even your profession could help save you money, if you’re a teacher or first responder.

●    Get a preapproval letter. While a lender’s preapproval letter isn’t a guarantee that a bank will loan you money, it tells the seller that you’re a good bet to get financing. And many sellers won’t move forward without one.

●    Schedule an appraisal. Lenders need proof of the value of your home in order to assess the risk they’re taking on: They won’t want to lend you (or any prospective buyer) more than the home is worth.
 
You’re on Your Way!
Next up is working with an agent to find a place you love. Stick to your budget, inspect the place, negotiate and celebrate!

Rich Beattie is a former executive digital editor of Travel + Leisure and has written for outlets such as The New York Times, Popular Science, New York Magazine and SKI.

Read about first time buyers in a new type of housing market.