The housing market and mortgage process can be a complicated one for first-time home buyers. In addition to high financial stakes, the homebuying process is full of strict timelines, jargon, and acronyms. So where do you start? And how do you ensure that you’re getting the mortgage that’s right for you?

In this guide, we’ll walk you through everything you need to know as you enter the mortgage process and prepare to purchase your first home.

First Steps

As a first-time homebuyer, you’ll need to take a few steps before you figure out how much you can afford to spend on your first home mortgage, and then get pre-approved for a mortgage loan.

You also need to decide how much you can afford for a down payment, which may determine whether you choose conventional financing or an alternative, low down payment option – such as our Next Horizons Mortgage program.

Try our online mortgage calculator to help determine how much you can afford.

Do you need 20 percent down?

While it’s often recommended to have 20 percent of your purchase budget saved for a down payment, you can still purchase a home with a smaller down payment.

Generally, if your down payment is less than 20 percent of the cost of the house, you may be required to pay private mortgage insurance (PMI). Private Mortgage Insurance is mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults.

Ultimately, PMI allows you to purchase a house with less money down, but it does mean your monthly mortgage payment will be more expensive.

Types of Mortgages

Next, you’ll need to figure out what kind of mortgage is right for you. Are you planning to use a Federal Housing Administration (FHA) loan or a conventional loan? Are you a veteran who will qualify for a Veterans Affairs (VA) loan?

Each mortgage type is unique and may come with requirements for a down payment amount or credit score. Most mortgages, regardless of “type,” will allow you to choose a 15- or 30-year term and allow you to select whether you’d like a fixed or adjustable rate – but we’ll get into that a little later.

First, here are some of the most common types of mortgages you’ll encounter as you prepare to enter the market.

VA Mortgage: A Veterans Affairs (VA) mortgage is a mortgage that is guaranteed by the Department of Veterans Affairs (VA). It may – along with FHA loans – also be called a government mortgage, and is available to those who have served, or are serving in our nation’s military.

FHA Mortgage: A Federal Housing Administration (FHA) mortgage is another type of government loan. These mortgages are insured by the Federal Housing Administration (FHA). While an FHA mortgage may have lower down payment and credit score requirements, it also typically has a much stricter appraisal process once you make an offer on a house.

Conventional Loan: A conventional loan is probably what most people think of when they think of a mortgage. These loans require a solid credit score – often 620 and above – and it’s preferred that buyers have the recommended 20 percent of the cost for their down payment.

Construction Loan: A home construction mortgage is a loan that you secure if you’re planning to build your house. Lenders generally require home construction loan borrowers to make larger down payments and also typically have more stringent credit requirements for borrowers seeking a construction loan.

The repayment term can also be much shorter than a typical mortgage. Some home construction loans must be paid off in a year or less, depending on the type of loan the buyer secured, and standard interest rates are generally higher as well.

Once you’ve determined what kind of mortgage suits your needs, it’s time to locate a lender and get pre-qualified.

Mortgage Pre-Qualification

Mortgage pre-qualification, or mortgage pre-approval, is a tentative approval from a lender of your choice for a specific sum of money. In other words, the lender is vouching for your ability to take on the debt of a home purchase and declaring that they are willing to lend you the funds to do so.

Some lenders, such as First Merchants, may offer an online pre-approval application process to help make things quick and easy.

To get pre-qualified, you will need to contact a lender of your choice and let them know your homebuying budget as well as the type of mortgage you’d like to apply for. The lender will request some paperwork from you – usually a few forms of identification, your tax returns and W-2s, recent bank statements, and at least a month’s worth of paystubs. Once they have that information, the lender will either approve the loan amount you’ve requested or come back with an alternate amount. You should receive this notice in an official prequalification letter, which you can present to buyers when you make an offer on a home.

Getting pre-qualified helps speed up the homebuying process, signaling to a seller that you are a serious buyer who has already submitted some initial paperwork and established a relationship with a lender. In a hot real estate market, this usually indicates that should they accept your offer, a seller can expect to close on the sale quickly and easily.

Determine your interest rate

Your pre-qualification letter should also include a projected interest rate for your mortgage – this can help give you a rough estimate of what your monthly mortgage payments will be and can help you adjust your homebuying budget before you put in an offer on a house.

You may even be able to do a bit of this work before you get prequalified, based on what the current market rate is, or based on specific lenders’ advertisements. you’ll get a peek at what that rate could boil down to once you’re prequalified – though it won’t be fully determined until you start closing on a property.

Regardless, you’ll want to try and ballpark your interest rate BEFORE you start securing a mortgage after an offer has been accepted.

But what kind of interest rate is best? And what are the differences between a fixed and adjustable rate?

A fixed-rate mortgage is a mortgage where the interest rate is generally set above market rates but remains consistent over the entire life of the loan. If you can purchase a home when interest rates are low, a fixed-rate mortgage allows you to keep that great interest rate for the life of the loan – but if interest rates are inflated or unusually high, you may want to consider an adjustable-rate mortgage.

An adjustable-rate mortgage is a mortgage where interest rates can fluctuate over the length of the term, but the initial interest rate is set below the market rate. Some adjustable-rate mortgages offer initial fixed interest rates for three, five, or seven years and then adjust over the remainder of the loan term. In other words, it can save you money in the short term, but interest rates fluctuate and may increase over time, so it could cost you more in the long term.

You may also encounter a growing-equity mortgage, which is a fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.

Find your dream home

Once you’re pre-qualified and understand your budget, it’s time to start shopping for a home. Look for homes that fit your lifestyle and budget. Once you find your home, work with your real estate agent to negotiate the price and address any potential issues before you secure your mortgage.

Your offer has been accepted – now what?

A seller accepted your offer, and you’re one step closer to your dream home – but what happens now?

First, you’ll likely be asked to pay earnest money. Earnest money is a deposit made to a seller that represents your good faith to follow through on your offer to purchase a home. It can be a small amount – as little as $500 or $1,000 – or a larger amount like $5000 - $10,000. This amount will be deducted from the final price of the house at closing, and should the sale fall through for any reason besides specific situations – usually detailed in your offer letter – the seller will keep the earnest money.

Then, you will enter what’s known as the “due diligence period.” Due diligence is a set period of time – usually 60 to 90 days – for you to pull permits, get a home inspection done, and get the house appraised.

Your lender or real estate agent will arrange the appraisal, which is a third-party service to determine the actual value of your home and is folded into the price of the sale and closing costs.

You will need to arrange and cover the cost of a home inspection or pulling permits. Home inspections can reveal any underlying issues that you might want to address. Some prospective buyers negotiate with sellers by asking them to make repairs or replace major appliances – or renegotiate the price – before they finalize their purchase.

During this time, you will work with your lender to provide any additional documentation needed for your mortgage. This process will usually give you a final view of how much you’ll owe at closing (your down payment and closing costs), as well as what your monthly mortgage payment will be.

Depending on your lender and your mortgage type, this may include a rate lock. A rate lock is a commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Step into your future

Once you’ve applied for and secured a mortgage loan, you’re ready to close, which your lending officer and real estate agent can help you with.

You and the seller will negotiate a timeframe between getting the title (closing) and getting the keys (possession). While it is common to take possession of the home on the day of closing, sometimes, sellers will request a few days or weeks between closing and possession – for example, they may request two weeks to a month after closing to finish packing and moving out of the home before surrendering the keys.

Once you have your keys, it’s time to move in and enjoy your new home!

Learn more about preparing to own your new home. Check out our Homebuyers’ Journey for more information!