If you’re curious to know what no one tells you about getting your first mortgage, you’re in the right place. You’re already caught up on what to know before getting a home loan, but you’d like a little more than just the basics. Whether you’re just starting to think about homeownership or you’re ready to get serious, you’re probably wondering things like:
- What goes into a mortgage payment?
- How much of a down payment do I need?
- Can I change jobs during the application process?
I’m here to answer ten of the most important questions you might have about getting a home loan. Let’s dive into what no one tells you about getting your first mortgage.
What no one tells you about getting your first mortgage: 10 things
Your monthly payment includes more than just your mortgage
When you take out a loan for a home, you’re going to pay it back. That seems pretty straightforward. Once you get your interest rate figured out, some simple arithmetic is all you need to calculate your monthly payment, right?
There are actually four components of a typical mortgage payment: principal, interest, taxes, and insurance.
- Principal — This is the loan amount you borrow. For example, if you finance $200,000 to buy your home, your principal is $200,000.
- Interest — Like any type of borrowing, interest is tacked onto your monthly payment. The higher your interest rate, the more that gets added to your monthly payment, which could total hundreds per month. That’s why it’s key to search for the best rate you can get and work alongside a mortgage professional.
- Taxes — Property taxes are also typically added to your monthly payment. These are assessed by your local government and go toward funding government services in your area. Your lender usually sets aside each month’s tax payment you make into an escrow account, and they’ll pay these taxes (usually twice per year) on your behalf.
- Insurance — Private mortgage insurance, or PMI, is what gets added to your monthly payment if your down payment is less than 20% of your loan. The good news is that once you pay your loan down to 78% of its original value, you don’t pay PMI any longer and can instead save that money.
For a more detailed breakdown, check out this post about the mortgage payment structure.
Don’t have kids? School district matters still
Even if you don’t have kids, consider buying in an area with a good school district. This will give you a win no matter which way you look at it:
- If you do eventually have your own children, you’ll have great schooling options and peace of mind when it comes to their education.
- Kids or no kids, when it comes time to sell your home, being in a great school district helps you sell faster. Think of all the parents who will be eager to buy in order to provide the best schooling for their kids.
It’s also a safe bet for you to buy in a great district because it can protect the value of your home even if market values decline. Check out this article for more details about why you should buy in a good school district.
You don’t need 20% down
Though you usually put 20% down for a conventional mortgage loan, there are now many more options to help get you into your first home. Down payment assistance programs can help you cover some or all of your upfront costs. There are also low- to no-downpayment loans available through the federal government, such as:
- FHA (Federal Housing Administration) loans, which allow you to have a down payment as low as 3.5%.
- USDA (US Dept of Agriculture) loans, which allow you to finance 100% of your mortgage without a down payment.
- VA (Veterans Affairs) loans, which allow you to finance 100% of your mortgage, get a low interest rate, and even eliminate PMI.
There are, of course, eligibility requirements for each of these loans. Don’t hesitate to get in touch with me to see if there are any down payment assistance or special financing programs you qualify for.
Don’t open or close lines of credit when you’re buying
Lenders are all about assessing risk when giving you a mortgage loan. What no one tells you about getting your first mortgage is that you shouldn’t do anything drastic to the lines of credit you have. You might be tempted to open a credit card so you can buy new furniture. On the opposite side of the coin (no pun intended), you might want to pay off some debt to show how financially responsible you are now. Here’s why you shouldn’t do either of these things:
- Opening and using a new credit card will negatively impact your debt-to-income ratio, which is a key metric lenders use to calculate how much they’ll loan to you.
- Paying off and closing a line of credit might give you some immediate relief, but could negatively impact your total credit utilization percentage. Say you have two credit cards each with a $2,500 limit. Of the $5,000 total credit, you have one card maxed out, while the other has only $500 on it — a total of $3,000 used, or 60%. If you’re suddenly inspired to pay off the $500 balance and close the card, you’ll now only have $2,500 total credit, of which you’re using 100%. Lenders see this as added risk, so if you do pay off your balance, resist the temptation to close the card.
Keep tabs on your credit
Going along with the previous point, it’s a good idea to keep an eye on your credit even after you’ve been approved for your mortgage. You can actually be denied a mortgage even after your closing disclosure document is issued, meaning you’re pretty much back at square one in terms of shopping for a lender.
Think about it this way: your mortgage lender is trying to see how risky you are. The less risky you are with your finances, the better your chances are of getting approved and closing on your home. A general rule is to just keep all your finances as steady as possible right before, during, and after you’re approved. Even then, it’s a good idea to have a few mortgage payments made before you open any new lines of credit.
Don’t move money around
Again, lenders are trying to assess how much risk they’re taking when lending you money. They want to be able to properly account for all your funds, which helps them meet compliance and eliminate any potential for fraud. If you’ve moved money around in recent months, especially any large sums from checking, savings, mutual funds, or even 401(k) accounts, it can be tedious for you to track down all the documentation that your lender needs. You’ll need a paper trail for any money you move, which could prolong the process and make you frustrated.
Don’t change jobs
Seeing the theme of this post yet? Lenders want to see you as a safe bet in terms of loaning you a large sum of money. Having a steady income is part of it. Now isn’t the time to switch careers or take a pay cut to pursue something else. If you’ve got a stable job, keep it — unless you have the opportunity to move up to a higher-paying role. In that case, you’ll need the offer in writing to prove your job change and your salary increase.
See what building and development plans are upcoming
Realtors always harp on location, location, location — and for good reason. That’s because the areas around and nearby your house will have a major impact on your lifestyle, whether you plan to stay for years or sell in the future. If you’re house-hunting in a neighborhood, visit the local planning office to see if there are upcoming development plans. You might have only a few neighbors now, but how will you feel if ten more houses get built in the next two years after you move in? What if traffic gets crazy when a shopping plaza is put in across the road? These kinds of things can also affect you when it comes time to sell because they’re the things potential buyers will see when they look at your property.
Get a good home inspection
Home inspections aren’t required, but they protect you as a buyer. They can reveal serious issues that cost a lot of money to fix. You might be tempted to save the inspection cost now, but you might end up paying for it many times over if you’re left dealing with a deteriorated septic system, cracked foundation, or defective furnace. Pay the extra money to get a quality home inspection, and take it a step further by hiring a contractor to quote you on the real cost of any needed repairs.
You are your landlord
When the dishwasher leaks, it’s your time and money that go into fixing it. Same with simple things like a slow drain, or more serious issues like a flooded basement. You are your own landlord. It’s up to you to care for and maintain your castle, so get advice or help wherever you can find it.
It’s never too early to prepare
No matter where you are in your house hunt, it’s never too early to prepare for the next step. Download my free Path to Homeownership Guide for details to keep you on track for a successful home purchase.
Feeling ready now?
Book your in-person or virtual home buying consultation with yours truly. See what it’s like to have 25 years’ worth of experience working for you.