How to Find the Right Loan for Your First Home

Mortgages aren't one size fits all. So, how do you know which one is right for you? Start by asking yourself these questions. 

Research special mortgage programs 

Saving for the down payment, worrying about interest rates, and taking out a big loan can seem pretty daunting for a lot of first-time home buyers. But we'll let you in on a little secret: there are lots of programs out there designed to help first-time buyers own a home. The programs might assist you with your down payment, lower your interest rate, or provide other incentives, like help with your student loans. It might sound too good to be true, but it ends up being a win-win. You get to start building equity in your home and possibly save money on rent and your city and state can count of you to be more invested in the area and to pay taxes every year. 

You might not be able to take advantage of these programs when you're ready to move out of your first home, so be sure to look into them now. If you're having trouble finding a program, you should try talking to your lender or Realtor. They might know about programs you don't or they might know how to help you qualify for a loan you thought was out of reach. 

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Go local 

Most people are familiar with some of the bigger, federal programs designed for first-time buyers, but not everyone knows that your state or city might have their own first-time buyer program. Cities like Detroit and Baltimore have used these programs to help with revitalization in their downtown areas. Imagine getting in on one of the coolest areas in town before it gets too expensive!

Other states use the programs to encourage first-time buyers who are interested in moving to rural areas or starting an agricultural business. Take a look at your city and state government's website to see if there's a program available. If you don't see anything online, don't give up! Try calling someone from the community development or housing department. They might have information that's not available online. 

More: See how one young home buyer took advantage of her city's first-time buyer program

Learn about mortgage rates

As a first-time buyer, you might be ultra-focused on the price of your home, but you should never overlook your mortgage rate. This little number will tell you how much extra you'll pay in interest every month and over the life of your loan—so it's pretty important.

So, how do you get a lower interest rate? The most straightforward way is to have great credit, a 20 percent down payment, and little to no debt. That essentially tells your lender that lending to you isn't very risky because you have a history of paying back your loans. 

Not every first-time buyer has a stellar financial record, but the good news is there's another option. A lot of lenders let you buy discount points to help lower your interest rate. When you buy points, you're essentially prepaying your interest, which will lower your overall interest rate by about 0.25 percent. There's a lot to consider to decide if those points are worth it and you might just be better off putting that extra money toward a downpayment. Talk it over with your lender and ask to see how those points affect your loan in the short and long term. 

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Consider an ARM

An adjustable rate mortgage isn't necessarily designed for first-time buyers, but it can be a great option. ARMs start off with a set period where your interest rate is fixed. So in a 5/1 ARM, you'll have a fixed rate for 5 years and after that, your interest rate will adjust every year. The rate doesn't always adjust up either, if rates have gone down in your area since you got your mortgage, you might end up paying less. The reason these are an option for first-time buyers is it gives you five years to improve your credit, lower your debt, and raise your income. After that initial five year period you always have the option to refinance—and now that you're in a better financial position, you have a better chance of locking in a low-interest rate for a 15 or 30 year fixed rate mortgage. 

More: See if an ARM is right for you

Find the right lender and get preapproved

It's always a good idea to talk to a few different lenders about getting your mortgage. Sure, it might be easier to go directly to the institution where you already bank, but shopping around will give you some negotiating power and help ensure you get the lowest mortgage rate possible. Be sure you take some time to look at average rates for your area, checked your credit report, and eliminated as much debt as possible before you finally choose a lender.

While you're looking for a lender, you should also be thinking about getting preapproved. In this step, your potential lender will ask you about things like your income, debts, and assets before doing a credit check on you. Once that's all done, they'll let you know how much they would likely lend you if you decide to apply, but it also doesn't mean you have to go with that lender when the time comes. All a preapproval does is let a potential seller know that you're serious about buying a home and it's likely that you will be able to get a mortgage that will cover the purchase price. This step can really set you apart, especially if you're in a seller's market. 

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Get your paperwork together 

When you apply for a mortgage your lender wants to know everything about you. And we mean everything. The amount of paperwork you'll be doing can be a little overwhelming, so we always recommend getting it ready in a folder before you start meeting with lenders. That way you can focus on making sure you're getting the best rates without stressing out about getting your paperwork together. It lowers your stress level and it helps speed up the process. A lot of times lenders can't start processing your application until they have all your documents and during their busy seasons one missing document might mean a lot of applications are getting pushed ahead of yours.  

More: Get your documents together before you apply for a mortgage

Don't make any financial changes

When you're waiting to get approved for your mortgage, it's extremely important you don't make any major changes to your finances. That means no new credit cards, no car loans, no changing jobs. If any of that happens, your mortgage lender will need to start the process over and you'll have to wait even longer to get into your new home. 

More: You're not always in control of changes in your life. Here's what to do if you lose your job before your mortgage closes

Up next: How to Find a Realtor

Your Realtor or real estate agent will be your guide to the entire home searching process. Get our tips on how to find the right Realtor