When you decide you want to buy a home for the first time, it might be all you think about for a while: What should it look like? Where do I want to live? Bedrooms? Open plan? Condo? Neighborhood vibe? Walkability score? Schools? Pool? (Fingers crossed for the pool.)

All good questions. But there are others you need to be asking, too. Like, is my debt-to-income ratio and credit score ready? And, how long do I want to take to pay off the mortgage?

Knowing which money moves to consider when you’re buying a home for the first time is the smartest way to prepare yourself for the process ahead. Here, we’re sharing eight tips for first-time homebuyers to help you get the clarity to make a plan, gain the confidence to see it through, and have the best chance of smoothly snagging your dream home.  

1. What types of mortgages are there?

When you take out a mortgage to buy a home, you’re taking out a loan so you don’t have to make the entire purchase upfront. You’ll always be paying back two things:

• First is the “principal,” which is the cost of the house plus any other costs you want / are able to add to the loan, such as renovations and closing costs.
• The second thing you’ll pay back is interest.

There are two types of mortgages: fixed-rate vs adjustable-rate mortgages.

• A fixed-rate mortgage charges you a set interest rate that doesn’t change for the entire loan.
• An adjustable-rate mortgage (ARM), aka a variable-rate mortgage, starts out with an interest rate that’s below what a similar fixed-rate loan would have. That rate holds for a set time (typically three, five, seven, or ten years), but then could possibly (and often does) go up later on.

The Ellevest recommendation: Fixed-rate mortgages because they’re easy to plan around. ARMs can be tempting because that initial rate is so low, but they’re much more complex and the sticker shock when the rate goes up can be a lot for most people.

2. What are the mortgage terms?

The two most common timeframe terms for fixed-rate mortgages are 15 years and 30 years.

• A 15-year fixed mortgage typically comes with a lower interest rate, but also higher monthly payments. That means you’ll end up saving money over the course of the loan … but only if you can afford the monthly payment.
• That’s why most buyers opt for a 30-year fixed payment instead: It comes with lower monthly payments than the 15-year fixed payment mortgage, and it’s more predictable than an adjustable-rate mortgage.

The Ellevest recommendation: A 30-year mortgage, even if you think you want to pay it off in 15 years. You can plan to make the same size payments you’d have made with a 15-year mortgage, but this way, your required minimum payment could be lower if you need it to be. You might end up paying a little bit more in interest, depending on how it shakes out, but you’d also have so much more flexibility to help you handle life’s curveballs.

3. What down payment can I afford?

Saving for a down payment is one of the biggest blockers to owning a home — particularly for BIPOC people, especially Black people, who’ve not had the same access to homeownership as a wealth-building tool due to systemic racism. That’s because putting a 20% down payment on a house is the gold standard. But it is possible to buy a home with less — and as little down as 3.5%. And with home prices what they are these days, does that 20% standard still make sense?

I’ll put it this way: The less money you put down initially, the easier it is to get “underwater” if the value of your house drops. In that scenario, you’d owe more in mortgage payments than your house is worth.

Additionally, if you’re thinking of putting less than 20% down on a home — or it’s just impossible to manage that percentage — know that you’ll need to pay for Private Mortgage Insurance (PMI) in addition to your mortgage payments. (Or, for certain loans, a federal mortgage insurance premium.)

• The amount of PMI you’d owe is different for everyone, as it’s impacted by factors like your credit score and debt-to-income ratio.
• It’s fairly easy to get out of PMI down the road with a refinance or a reappraisal on your home.

The Ellevest recommendation: If possible, make a 20% down payment, although you might not have to save for it all on your own …

4. What programs can help me with a down payment?

Down payment assistance (DPA) programs help eligible homebuyers secure loans or grants to help cover that cost. Some help pay for closing costs, too.

You can find DPAs at Down Payment Resource, a tool that matches you to the type of assistance you need, or through:

• Your state’s Housing Finance Agency
• Your city or county website
• The US Department of Housing and Urban Development
• Non-profits like National Homebuyer Fund
• Your lender

The Ellevest recommendation: There’s no reason not to explore all of these options.

5. What mortgage is best for me?

There are two main mortgage considerations: government-backed mortgages or conventional mortgages. But within those, there are lots and lots of other considerations, as you’ll soon see. It’s a lot of information, but it’s all to help you find the best way to make your homebuying goal a reality.

First, we’ll talk government-backed mortgages.

These are home loans insured by the federal government and issued by private mortgage lenders, like a bank . This home loan often comes with restrictions (like income limits and restrictions on use to buying a primary residence). But government-backed loans can make it easier for first-time homebuyers to qualify for a mortgage.

• There are three types of government-backed mortgages: FHA loans, USDA loans, and VA loans.
  
  • FHA loans: The Federal Housing Administration is the world’s largest insurer of residential mortgages. It guarantees a portion of the loan, and then your lender does the rest.

That means you might be able to go forward with a lower credit score, a higher debt-to-income ratio, or a smaller down payment (though again, by doing so, you’d run a higher risk of going underwater if the home’s value drops).

No matter the size of the down payment — even if it’s more than 20% — FHA loans require you to pay a mortgage insurance premium and prove that you have a steady income.

• USDA loans: USDA loans might make you think they’re for farms, but they’re really for houses in rural areas.

This program guarantees 100% of your loan, possibly with no down payment. There are income limits, and your home must be in a qualified rural area.

• VA loans: If you’re an eligible service member, veteran, or surviving spouse, a VA loan can be a really great benefit.

You’ll need to pay a funding fee for the loan, but there’s no minimum credit score, no mortgage insurance required, better terms and interest rates, fewer closing costs … and possibly even no down payment.

Now, let’s talk conventional mortgages.

These are home loans not insured by the federal government and issued by private mortgage lenders, like a bank, as well as the two government-sponsored enterprises (GSEs): the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This home loan often comes with restrictions (like credit score minimums).

• There are two types of conventional mortgages: conforming and nonconforming.

• Conforming conventional mortgages follow a set of guidelines set by Fannie Mae and Freddie Mac. Lenders tend to prefer conforming loans. Conforming loans must fall below a limit, which is set based on housing prices in the county. A mortgage that exceeds the limit is called a jumbo mortgage. As the name suggests, these mortgages are bigger, not backed, and not insured. They require you to show you’re in a really good financial state to apply successfully.
• Nonconforming conventional mortgages don’t follow those guidelines.

There are other lending programs to consider, too:

If you’re a vet and you or your spouse is Native American, you can apply for a Native American Direct Loan for a home on federal trust land.

A 203(k) Rehabilitation Mortgage allows you to borrow money for improvements on homes that are at least one year old and combine it with your FHA mortgage into one loan.

With an Energy Efficient Loan, you can borrow the money you need for energy-efficient upgrades to your new home and combine it with your mortgage into one FHA or VA loan. It may help you qualify for a larger loan, too.

The Good Neighbor Next Door buyer aid program gives housing aid (aka money) to first responders and teachers buying from a list of properties in “revitalization areas.” Downside: Those areas are limited. Upside: The program can help with up to 50% of the listed price (whoa).

The HomeView Ready Buyer program gives 3% in closing cost assistance to first-time buyers. You have to take a class, and you have to buy a “Fannie Mae-owned home,” aka a home Fannie Mae has foreclosed on. That means the property may not be exactly where you want to live, and may not be in the best shape — but they’re very affordable.

The Ellevest recommendation: The best mortgage is the one you’re eligible for and can afford. It's important to learn about what's best for you depending on your financial situation.

6. What do I need to successfully apply for a mortgage?

Lenders will want to know about:

• Your credit score. People with higher credit scores are not only more likely to get better interest rates (which makes borrowing that money less expensive), but also get higher loan amounts.
• Your debt-to-income ratio. Lenders want to know that you’ll have enough money to comfortably pay them back each month without getting behind on payments.  They’ll want all of your debt — credit cards, student loans, car loans, everything — to total in at about 40–42% of your income. Some lenders may be willing to work with you with a debt-to-income higher than that, but it likely comes with more strings attached.

• Your documentation about your source for a down payment. They’re pretty picky about where that comes from, because they don’t want you to go into debt to take on a much bigger debt. If it’s savings in cash or investments, obviously great. If it’s coming from family members, it needs to be processed as a gift using the correct sourcing, not as a personal loan.

If you get a jumbo mortgage, lenders will have tighter restrictions. Usually they’ll require great credit and at least 15% down (if not 20%), and possibly 6–12 months’ worth of payments in assets. But in my experience, only about 25% of people end up needing this kind of mortgage.

The Ellevest recommendation: Get your down payment source documentation in order, and work toward improving your credit score and lowering your debt-to-income ratio if needed before you look for a mortgage lender.

7. How do I find a mortgage lender?

There are two steps to follow:

• Apply for prequalification. Prequalification means you’ve provided a lender with a high-level financial picture and they tell you how big of a mortgage you’re likely to receive. This isn’t a guarantee of lending, but it’s a headstart. It's a relatively quick process, so do this with several different lenders so you can drill down on the terms they’ll offer.
• Apply for preapproval. Preapproval is much more involved. It means you’ve completed an official mortgage application with a lender and given them detailed financial documentation so they can perform a financial background check and a credit check. If you’re preapproved, lenders will provide you an actual letter as a commitment with conditions for an exact loan amount. Sellers are more likely to negotiate with people who are prequalified, too; and pre-approval often allows borrowers to close more quickly (an asset in a highly competitive market).

The Ellevest recommendation: Shop around. Two-thirds of homebuyers in a study said they did comparison shop, and they got better terms than those who didn’t. Look at different kinds of lenders — online lenders, banks, and credit unions. See what kind of initial rates you’re quoted on the type of mortgage you want, then narrow your options down to a handful of contenders.

8. How do I know my all-in costs?

Finally, start calculating the costs. Besides the cost of the mortgage itself, there are two other types of costs: closing costs and moving costs.

• Closing costs are the various fees you need to pay to seal the deal. They can potentially be rolled into your mortgage, though you may want to just pay them upfront so you can save on interest. They can include:
  
  • A portion of your property tax upfront (typically 3–6 months)
  • Title search fees (most of the time)
  • Attorney’s fees to help make sure the title is clear
  • Title transfer fees (for the county to record you’re the owner)
  • Tax on the transfer in most states
  • Extra money down upfront to get a lower interest rate (called “ paying points ”), which is another amount that can go into the costs
  • An origination fee for the lender to do the paperwork
  • Renovation costs, if you want to roll them into the mortgage

• Moving costs can’t be rolled into a mortgage, but you’ll still want to budget for them. Here’s what you should be thinking about:
  
  • Renting equipment, boxes, etc
  • Taking time off of work
  • Hiring movers (the cost of which varies, depending on the level of service and distance)
  • Furnishing costs — which are optional, but pretty much always happen (because rooms need things to sit on and such)

The Ellevest recommendation: When you’re budgeting, aim to save up an extra 3–5% of the home price to cover these two things.

Want a clearer picture of how mortgages work? Book a complimentary 15-minute call with one of our all-women financial planners to understand which Ellevest offering or service may be a good fit for you.

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