9 Expert Tips New Mortgage Borrowers Must Know Before Applying

Buying a home for the first time isn’t easy. I know; I’ve actually been a first-time homebuyer … twice. 

That’s because I completely miffed it the actual first time around, when I didn’t know what I was doing. My husband and I had to give our first home back to the bank and rent for a while. 

By the time we were ready for Round 2, enough time had passed so that technically, we were considered first-time homebuyers again. We were fully prepared this time, and so far, things have gone off without a hitch. (Fingers crossed.) 

I’ll share with you some mortgage tips I learned along the way, so you don’t have to make the same mistakes I did.

Table of Contents

1. 1. Take advantage of first-time homebuyer programs
2. 2. Know how much you can afford
3. 3. Low-down-payment mortgages are way more expensive in the long run
4. 4. Your mortgage payment can change, even with fixed-rate loans
5. 5. It’ll be years before your mortgage balance starts noticeably decreasing
6. 6. Know what contingencies are important to you
7. 7. Make sure you have enough to cover the earnest money deposit
8. 8. Your mortgage lender will probably change
9. 9. Work with an experienced lender for your mortgage type

1. Take advantage of first-time homebuyer programs

I didn’t realize the first time around how much help was available for first-time homebuyers. Many nonprofits and local governments offer grants or low-cost loans to help boost your down payment. 

You’ll need to be proactive about finding these programs, though. A good place to start is with a Google search for “first-time homebuyer assistance programs in (insert your state, county, or city here).”

2. Know how much you can afford

Ah, the million-dollar question: What’s your budget?

We didn’t have a clue how much we could afford with our first home, so we mostly just asked our lender how much it would approve us for based on our debt-to-income ratio, and went from there.

0/10, would not recommend. This ultimately put us in a home we couldn’t afford. 

The next time around, we started working with a financial planner a few years before we bought our house. By the time we were ready to start searching, we knew exactly how much we could afford without compromising our other long-term goals, regardless of the wild numbers lenders said we could borrow. 

After nearly a year of searching, having that kind of knowledge actually gave us the confidence to place an offer above the asking price when we finally did find our perfect home. And that’s ultimately the reason I’m writing this article from that home today.

3. Low-down-payment mortgages are way more expensive in the long run

If, like me, you were not born into a family of millionaires, you know the struggle of saving up for a down payment all too well. Conventional wisdom says to put 20% down to avoid private mortgage insurance (PMI), but with average home sales pushing $413,500, that’s nearly $83K in cash, even before all the other home-buying costs.

In fact, the median down payment among first-time homebuyers is 10%. (For repeat homebuyers, it’s 23%.) Many first-time homebuyers put down even less when buying a house. 

My husband, being a veteran, is eligible for zero-down VA loans, something that made our ears perk up while he was still in the Army. No down payment? Heck yeah, we thought!

But skipping the down payment meant taking out a larger loan, with a bigger payment, and that gave us less wiggle room when things went wrong. 

It also meant that, had we kept that first house, it would have been way more expensive when we finally paid it off. We had the opportunity to put nothing down again on our second home, but we deliberately threw as much at it as we could.

Here’s an example of how much a difference that can make, comparing costs on a median-priced, $413,500 home using a 30-year conventional loan with a 6.19% interest rate (PMI not included):

4. Your mortgage payment can change, even with fixed-rate loans

I used to think PITI (pronounced “pittie”) was what people called their pet pit bull terriers. Alas, this obscure mortgage term describes how your monthly payment is divvied up:

• Principal: Pays down the actual balance of your mortgage. 
• Interest: Pays the lender for letting you borrow the money. 
• Taxes: Set aside into an escrow fund to pay your property taxes when due.
• Insurance: Set aside into an escrow fund to pay your homeowners insurance when due.

Nine out of 10 homeowners opt for fixed-rate mortgages, usually because they don’t change over time. But it’s only the P+I that doesn’t change. The T+I part, taxes and insurance, can, and do, change every year. 

Property taxes go up and down, and if you ever notice a county vehicle sitting on the road in front of your home for a while (I see you), there’s a good chance they’re visually reassessing your property value, too. Insurance prices are always going up, sometimes prohibitively so, especially in disaster-prone areas.

5. It’ll be years before your mortgage balance starts noticeably decreasing

I was clueless about how mortgage amortization worked when we bought our first home. So you can imagine my face when I opened my first statement, saw that I paid $1,200, and then noticed the actual balance had only decreased by a speck.

That’s because interest is taken out of every single payment, and it’s calculated based on your remaining mortgage balance. Early on, your mortgage balance is large, and thus so is your interest payment. 

Over time, as you pay it down, more and more goes toward your actual mortgage balance. Toward the end, most of your payment is actually going to pay down your loan. 

A handy tip to pay off your mortgage faster is to round up your mortgage payment a bit, if you can. We set our autopay to send in a bit extra each month. Now, after a few years, we’ve paid off about 9% of our loan, so we’re 2% ahead of schedule.

6. Know what contingencies are important to you

Once you’ve found the home you want, the actual process of putting in an offer and negotiating the purchase seems more like a capoeira dance fight than anything.

Your armor: contingencies. 

A contingency is a condition written into the offer that, if a buyer accepts, allows you to back out of the deal scot-free. A good real estate agent can help you decide which ones to include and which ones you can leave out to keep your offer competitive:

• Appraisal contingency: The home appraisal must come in higher than your offer, since lenders won’t loan out more than the home is worth. 
• Financing contingency: The home itself must be approved by the lender; otherwise, you won’t qualify for a mortgage, even if you yourself are pre-approved. 
• Home inspection contingency: Even the prettiest house can hide major issues, and if an inspection reveals it will cost more than you bargained for, you can back out.

Our first home had major issues with the septic system that we ultimately couldn’t afford to fix, which led to our deed-in-lieu of foreclosure. The second time we bought a home, we made sure to include a home inspection contingency. 

7. Make sure you have enough to cover the earnest money deposit

Another expense that trips up many homebuyers is the earnest money deposit. You’ve scrimped and saved up a down payment, and just when you have an offer accepted, your real estate agent instructs you to write a check to the sellers for thousands more, a nail-biting-inducing scenario. 

There’s good news and bad news. You will need a way to come up with an amount that typically ranges between 1% to 10% of the purchase price, upfront, in cash. The good news is that it’s held in escrow until closing, when you can apply it toward your down payment or closing costs. 

If you back out of the sale due to one of the allowable contingencies listed on your contract, you’ll get all the money back. Otherwise, you could lose it for something as simple as not closing on time. Some lenders, such as SoFi, offer a $10,000 on-time close guarantee, which can help.

8. Your mortgage lender will probably change

When we took out our first home loan with XYZ Mortgage Company, I was surprised to see a letter in the mail a couple of months later saying Wells Fargo was our new lender. I thought it was a scam at first. I didn’t understand the difference between lenders in the secondary mortgage market:

• Loan originator: The lender that approves your loan in the first place; the one you work with during closing. 
• Loan purchaser: Often, loan originators sell your loan to another lender, who now owns your loan. 
• Loan servicer: Many lenders hire third-party companies (some of which, confusingly, are also lenders) to serve as the customer service department in managing your loan. 

We had a bad experience working with Wells Fargo through our deed-in-lieu of foreclosure. So when looking for the best mortgage lender the second time around, we made sure to ask potential lenders who they sold loans to, so that we wouldn’t end up with Wells Fargo again. Thankfully, we haven’t. 

9. Work with an experienced lender for your mortgage type

There are many types of mortgages, each with its own specific set of rules. Sometimes, these can get pretty granular, especially when comparing them with local conditions. That’s why working with a local (and experienced) lender can often be helpful.

Case in point: We thought everything was dandy when our offer was accepted on our second home. That’s until we found out VA loans typically require a joint maintenance contract for shared driveways, like ours.

Luckily, we’d also prioritized finding an experienced VA loan lender. They helped us find some creative workarounds without asking our future potential neighbors to essentially form an HOA so we could buy the home. 

It’s hard to plan for small details like that, but a good lender can be your best asset in making sure you get the home.