A First-Time Home Buyer's Guide to Your First Mortgage

Buying a first home is a series of large decisions made with incomplete information, usually under time pressure, in a language you have not had to learn before. The mortgage itself is where most of the money is decided — not just the rate, but the term, the fees, the down payment, and the fine print about what happens if you pay it off early or sell sooner than expected.

This guide walks through the sequence we use with first-time buyers in Davis and the surrounding towns. It is not a substitute for personal advice, and it deliberately avoids quoting today's rates, which will have moved by the time you read this. What does not move is the structure of the decision — and that is what is worth understanding before you start viewing homes.

Work out what you can afford, not what you can borrow

Lenders will often approve you for more than is comfortable, because their calculation focuses on the ratio of debt to income rather than on the life you want to live. A useful starting point is to keep total housing costs — mortgage, property tax, insurance, and any HOA dues — at or below 28% of gross monthly income. Many households can stretch to 33% or more, but stretching leaves little room for maintenance, childcare, or the unexpected.

Then subtract the costs that do not disappear when you buy: utilities, commuting, savings contributions, and the occasional holiday. A house that consumes every spare dollar is not a home you will enjoy. First-time buyers frequently underestimate maintenance, which for a single-family home commonly runs 1% of the property value per year — $6,000 on a $600,000 house, spread unevenly across the years.

• Mortgage principal and interest
• Property taxes (check the actual bill, not an estimate)
• Homeowners insurance and, where applicable, flood insurance
• HOA dues and any special assessments
• Maintenance and repair reserve
• Utilities, which may be higher than in a rental

Build the deposit and the reserve

Twenty percent down avoids private mortgage insurance on a conventional loan and usually earns a better rate, but it is not mandatory. Many first-time buyers put down 5% to 10% and accept mortgage insurance for a period, then request removal once the loan-to-value ratio drops. What matters is that the deposit is genuinely surplus: money you will not need for emergencies, and not borrowed from another source that adds to your monthly obligations.

Keep a separate closing reserve. Moving, furnishing, minor repairs, and the first month's overlap between rent and mortgage add up quickly. A reserve of 2% to 3% of the purchase price prevents the classic scenario where a buyer closes successfully and then finances the refrigerator, the blinds, and the plumber on a credit card at 24%.

Get pre-approved before you fall in love with a house

Pre-qualification is a rough estimate; pre-approval involves documentation and gives sellers confidence. Expect to provide recent payslips, two years of tax returns, bank and investment statements, identification, and details of any other debts. Self-employed buyers should prepare profit-and-loss statements and business returns, and allow extra time for underwriting.

Pre-approval is not a promise of funds, and it expires. It also does not lock your rate unless you specifically ask for a lock, which is a separate decision with its own costs. Keep the letter current while you are searching, and avoid moving money between accounts without a paper trail — lenders ask for the source of every large deposit.

Understand the main loan structures

Fixed-rate mortgages keep the same rate and payment for the whole term, typically 15 or 30 years. They are simple to budget and remove interest-rate risk from your household. The trade-off is a higher rate than the introductory period of an adjustable loan, and slower principal reduction in the early years.

Adjustable-rate mortgages start lower and then adjust on a schedule after an initial fixed period — commonly five, seven, or ten years. They can be sensible if you are confident you will move or refinance before the adjustment, but they are a poor choice if the post-adjustment payment would strain your budget. Always model the payment at the maximum cap, not just the teaser rate.

FHA and VA loans support specific groups and may allow lower deposits or better terms, with their own insurance costs, fees, and property standards. Conventional loans are the broader market and price differently according to credit score, deposit size, and property type.

There is no universally best loan. The right structure depends on how long you expect to stay, how stable your income is, and how much certainty you need in the monthly figure.

Compare the whole cost, not just the rate

Two offers with the same rate can differ by thousands of dollars in fees. Ask each lender for a loan estimate and compare the annual percentage rate (APR), which incorporates fees, alongside the interest rate. Look closely at origination charges, points, appraisal and inspection fees, title insurance, recording fees, prepayment penalties, and whether the quoted rate assumes a discount point you are paying for.

Three mistakes that cost first-time buyers real money

Spending the entire budget on the purchase price. Leaving no reserve means the first repair becomes debt, and the household is one insurance claim away from a cash-flow problem. Opening or changing credit during the process. A new car loan, a furniture financing plan, or even a large credit-limit change can alter the underwriting and delay or derail closing. Skipping the inspection to compete. Waiving an inspection to win a bidding war transfers unknown repair costs to you; if you must compete aggressively, at least arrange a pre-offer walkthrough with a qualified inspector.

There is a fourth, quieter mistake: choosing a lender because the website was easiest. The cheapest offer is rarely the first one you see, and the difference between three quotes is often worth several weeks of grocery money each year. Collect at least three written estimates on the same day so the comparison is fair.

After you close

Set up automatic payments immediately, and check the first statement carefully for escrow errors — property tax and insurance estimates are frequently mis-set in the first year. Keep your closing documents together, including the deed, loan estimate, closing disclosure, and title policy. If you are paying mortgage insurance, note the date when the loan balance is scheduled to fall below 80% of the original value, and request removal in writing when it applies.

Finally, revisit the loan every two years. Refinancing is not automatically good, but it is worth checking whether a lower rate, a shorter term, or the removal of insurance now outweighs the closing costs. A mortgage is the largest financial commitment most households make, and it deserves more than one review in thirty years.