Everything First Time Home Buyers Need to Know About a Mortgage Loan and Interest Rates in 2021
Mortgage Banker
Richard Blair
Published on April 1, 2021
Portrait of couple have bought of dream home with their first mortgage loan

Everything First Time Home Buyers Need to Know About a Mortgage Loan and Interest Rates in 2021

Getting a mortgage loan and buying a first home is one of the most exciting, and daunting, challenges most of us ever undertake. Not only do home prices include more zeros than many of us are used to, but the entire home buying process is unlike any other purchase and comes with lots of confusing terminology.

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The Mortgage Bankers Association (MBA) expects first time homebuyers to drive much of the growth in home sales in 2021. 2020’s historically low mortgage interest rates have carried into 2021, making it even more enticing to many would-be buyers to make 2021 the year they find their first, and maybe forever, home. With a seller’s market expected this spring, this means buyers searching for their first home will need to move fast when they see their dream house hit the market.

Though it varies from year to year, in general, 40% of residential real estate transactions occur between April and July. Realtors and mortgage brokers refer to this as the home buying season. Typically beginning in late March or early April and lasting through mid-summer, the home buying season sees sellers ready to list and show their homes, and potential buyers more than happy to take advantage of the gentler weather to see them.

For first-time home buyers in 2021, submitting the winning bid on your dream home may seem out of reach, but it doesn’t have to be. Keep reading to find out how to get ready for your house hunt now to gain a competitive edge later.

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Mortgage application loan agreement and house key

What’s a mortgage loan originator?

Believe it or not, cash sales are estimated to make up between 40-57% of home sales. Unlike cash buyers, traditional buyers finance their home purchases with mortgages. For first-time home buyers, the mortgage loan application and approval process is new terrain.

The first step in the process is mortgage loan origination. Choosing the right mortgage loan originator will determine if your home buying experience will be great or a nightmare. Whether you work with a mortgage loan originator at a big retail bank, a national mortgage banker, or a mortgage broker, the originator should help you assess your loan options and complete your application. From there, your loan originator will guide the application through the approval process–gathering paperwork, working with underwriters and loan processors, scheduling home appraisals–and, ultimately, to closing. Make sure the mortgage loan originator you choose is knowledgeable, experienced, clearly explains loan options and has credible online reviews from past customers.

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Why should I get pre-approved for a mortgage loan with a mortgage loan originator?

Above, we mentioned that a significant percentage of residential real estate sales include cash buyers. While individual buyers account for some of these sales, a greater percentage of cash buyers are investors.

For home sellers, offers from investors and other cash buyers are appealing. While cash buyers may bid lower than traditional buyers, they don’t have to satisfy the same financial and appraisal contingencies as traditional buyers, and may be seen as more of a “sure thing.”

If you’re a traditional first time buyer, take a deep breath: you CAN compete with (and beat!) cash-in-hand investors. The first step to submitting a winning bid is getting pre-approved for a mortgage with a mortgage loan originator. This will help you in more ways than one:

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  1. Set a realistic budget: While you may have a budget in mind for your new home, mortgage pre-approval will tell you precisely how much house you can afford. This will help you narrow your home search to the properties that are the best fit for your family AND your budget.
  2. Get in the door: Because of the Covid-19 pandemic, many homeowners are wary of opening their homes to too many strangers. Many sellers and realtors are asking for proof of mortgage pre-approval before they’ll show a home, so they can separate out the browsers from the buyers.
  3. Gain a competitive advantage: Many buyers search for homes and, once they find one they’re interested in, apply online or in person with a nationwide mortgage banker to get pre-qualified for a mortgage. By working with your mortgage banker to go beyond pre-qualification and get pre-approved for a loan, you can show sellers that you’re serious and ready to buy. If you get into a bidding war for your dream home, your pre-approval could be the deciding factor.

Home Mortgage Interest Rates Now in Phoenix, AZ

When you’re approved for a mortgage, your loan originator will discuss, among other things, the mortgage interest rate of your loan. In exchange for loaning you the money to buy a home, your lender charges you interest which you’ll pay back along with the principal amount of your loan.

Though 2021 mortgage interest rates remain historically low, rates can change daily (or even more often) and your mortgage rate will depend on a number of variables:

  • Credit score: Your credit score gives lenders insight into your past credit utilization and payment history. In some loan programs higher credit scores qualify for better pricing of interest rates.
  • Down payment: Mortgage rates are also affected by the amount of your down payment.
  • Loan type: Rates can vary significantly depending on whether you are applying for a conventional or government-backed mortgage product.
  • Interest rate type: Adjustable mortgage rates may be lower than fixed mortgage rates at the beginning of your loan, but can later increase or decrease depending on the market.
  • Loan term: In general, loans with shorter terms will have lower rates. For example, 30 year mortgage rates will be, in general, higher than 15 year mortgage rates.
  • Loan amount: Loans greater than the conventional loan limit, called Jumbo Loans, can lead to higher interest rates.
  • Type of Property: Mortgage rates are influenced by the type of property you’re buying such as a manufactured home, condominium, single family home, duplex, triplex or a four-plex.

What type of mortgage loan is right for me?

There are a lot of mortgage loan types first time home buyers might consider. Your mortgage broker can help you review the types of loans available to you based on the properties you’re looking at, your budget, and other factors.

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Conventional mortgages

A conventional mortgage is a mortgage loan that isn’t guaranteed or insured by the government. Some (but not all) conventional mortgages require higher down payments, but may have fewer restrictions on the types or location of the properties you can buy.

Though many believe all conventional mortgages require borrowers to have a 20-30% down payment, some qualified conventional mortgage borrowers are approved with down payments as low as 3%. If you pursue a conventional loan with a down payment of less than 20%, you’ll need to obtain Private Mortgage Insurance (PMI) and maintain it until you reach at least a 78% loan-to-value ratio.

Conforming conventional loans are those that meet the funding criteria of government-sponsored entities Freddie Mac and Fannie Mae. In 2021 for most of the US, the conforming loan limit is $548,250. A non-conforming conventional loan is one that exceeds this limit, such as Jumbo loans

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Government loan programs

Some common government-backed and -insured loans include Federal Housing Administration (FHA) loans, US Dept of Veterans Affairs (VA) loans, and US Dept of Agriculture (USDA) loans. These mortgage products are guaranteed by the federal government, so they typically have looser qualifying requirements.

  • FHA loans: If they meet all other loan criteria, FHA borrowers may qualify for mortgages with down payments as low as 3.5%. In addition to your down payment, an upfront fee equal to 1.75% of your loan amount is added to your mortgage, and you’ll need to maintain PMI for the life of the loan.
  • VA loans: Military members, veterans, and certain military spouses may qualify for VA loans with up to to 100% financing. VA mortgage rates are set by mortgage lenders and therefore fluctuate similar to rates for conventional and other government-backed loans.
  • USDA loans: Borrows who meet income requirements purchasing a primary residence in a designated rural or low-population area may qualify for a USDA loan with up to 100% financing. USDA mortgages are only available as 30-year fixed loans, and rates are determined by lenders.

Close-up shot of Homebuyers signing home contracts and house brokers holding house key.

Conclusion

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Life comes with enough uncertainty–you don’t need it in your home buying journey, too. At Richard Blair Mortgage Team we aim to make the home mortgage process easier, faster, and more transparent. We use cutting-edge technology, together with a personal touch, to give you insight into your loan options so you’re empowered to make wise financial decisions for you and your family.

Do you have questions about buying your first home? Call us today at 480-542-1085, or send us a message. If you’re ready to start your home search, we’re ready to help. Complete the home purchase qualifier to see how much home you can afford, and let’s talk about your options!

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