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A first lien mortgage loan is one of the most common ways for homebuyers to finance the purchase of a home. As their name implies, these loans are secured by having the first claim, or lien, against the home if the borrower defaults. In this comprehensive guide, I’ll walk through what first lien mortgages are, their requirements, how they work, and tips for getting the best rate on your loan.
What Is A First Lien Mortgage?
Also called a first mortgage or primary mortgage, a first lien mortgage loan is the original mortgage taken out by a borrower when purchasing a home. It has priority over any other liens or claims against the property.
For example, if you take out a first mortgage of $200,000 to buy a house, then later take out a second mortgage loan of $50,000 against the home, the first mortgage would be paid off first if you were to default and the house was foreclosed on.
The first mortgage loan serves as the primary financing that enables the home purchase in the first place. It is secured against the property itself, with the home as collateral.
Key Features Of First Lien Mortgage Loans
There are several key features that set first lien mortgage loans apart
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Priority position – As mentioned first mortgages have priority over other claims on the property in the case of default. This gives first lien lenders the assurance that they will be repaid first from the sale proceeds.
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Loan-to-value ratio – Most first mortgages have a loan-to-value (LTV) ratio cap of 80%. This means the loan amount is limited to 80% of the home’s appraised value. Lenders may require private mortgage insurance (PMI) if the LTV exceeds 80%.
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Tax deductible – The mortgage interest paid on a first lien loan is typically tax deductible, allowing borrowers to lower their taxable income. This applies to those who itemize their deductions.
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Collateral – The home that is purchased serves as collateral securing repayment of the first mortgage loan. If the borrower defaults, the lender can foreclose and take possession of the home.
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Repayment terms – First mortgages generally have 15 or 30 year repayment terms. The longer 30 year loans spread payments out over time, while 15 year loans build equity faster but have higher monthly payments.
First Lien Mortgage Requirements
When applying for a first mortgage loan, there are several requirements you’ll need to meet:
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Down payment – Most conventional first mortgages require a down payment of at least 5-20% of the purchase price. First-time homebuyers may qualify for 3.5% down payment programs. The more you put down, the better the rate.
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Credit score – Minimum credit scores range from 580 to 720 for first mortgages. Higher scores unlock better rates. Underwriting reviews your full credit report.
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Debt-to-income ratio – Your total monthly debt payments, including the new mortgage, usually cannot exceed 43% of your gross monthly income.
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Home appraisal – The property must be professionally appraised at or higher than the purchase price. This confirms the home’s market value.
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Employment history – Lenders want to see at least 2 years of stable income sources. Self-employed borrowers have to provide additional documentation.
As long as you meet the lender’s requirements, you can be well on your way to securing financing for your first lien mortgage!
How First Lien Mortgages Work
Here is an overview of the first mortgage process from application to closing:
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Get pre-approved – Being pre-approved shows sellers you are a serious buyer and gets the ball rolling with documentation.
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Find a home and make an offer – Knowing your budget range, find a home within your affordable price and submit an offer.
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Negotiate purchase agreement – Work out the purchase price, down payment, closing date, and other terms with the seller.
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Complete loan application – You’ll provide financial documents to verify income, assets, debts, and credit history.
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Home appraisal – The lender orders an independent appraisal to confirm the property is worth at least the purchase price.
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Underwriting review – The lender thoroughly reviews your application and supporting documents to approve the loan.
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Loan closing – This is when you sign the final mortgage documents and receive the keys! The down payment and closing costs are due at closing.
Throughout the process, your loan officer will keep you updated on the progress and next steps. It typically takes about 30-45 days to close once your offer is accepted.
Tips For Getting The Best First Mortgage Rate
Here are some tips that can help you lock in the lowest rate on a first mortgage:
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Shop around – Compare rates and fees from multiple lenders. Online lenders often offer competitive pricing.
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Boost your credit score – Good credit will unlock better rates. Pay down debts and correct any errors on your credit reports.
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Increase your down payment – The more you put down, the lower the rate since you’re less of a risk to the lender.
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Lower your debt-to-income ratio – Pay off credit cards and other debts so you have less monthly obligations.
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Choose a shorter term – 15 year mortgage rates are typically lower than 30 year loans. The tradeoff is higher monthly payments.
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Make a larger down payment if you can afford it – This allows you to avoid paying PMI and qualify for better rates.
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Consider points – You can pay points upfront to buy down the interest rate. Each point equals 1% of the loan amount.
Doing your homework on current mortgage rates and improving your financial profile can go a long way in scoring the lowest rate on your first lien home loan.
First Lien Mortgages Vs. Second Lien Mortgages
In addition to a first mortgage, borrowers sometimes take out a second mortgage on a property they already own:
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First Mortgage – The original mortgage loan used to purchase the home. It has first claim on the home if you default.
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Second Mortgage – A separate loan taken out later, using your home equity as collateral. It has subordinate claim behind the first mortgage.
Second mortgages come in two main forms – home equity loans and home equity lines of credit. Here’s an overview:
Home Equity Loan
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Fixed interest rate
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Single lump-sum disbursement
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Fixed monthly payments
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Typically 10-30 year terms
Home Equity Line of Credit (HELOC)
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Variable interest rate
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Revolving line of credit
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Pay interest only on what you use
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Typically 10 year draw period
Second mortgages can be useful for financing home renovations, repairs, education costs, or other major expenses. But they do incur additional fees and interest, so weigh the costs versus other financing options.
Alternatives To First Lien Mortgage Loans
While first lien mortgages are the most common approach, here are some other options for financing a home purchase:
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Adjustable-rate mortgages (ARMs) – Offer lower initial rates with interest rates that adjust periodically. This introduces some uncertainty.
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FHA loans – Government-backed mortgages that allow down payments as low as 3.5% for qualified buyers.
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VA loans – No down payment required for qualified veterans and service members. Limited closing costs.
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USDA loans – 100% financing available in designated rural areas for low to moderate income borrowers.
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Family loans – Borrowing from family members may provide more flexible terms but can cause issues if not documented properly.
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Lease-to-own agreements – Make monthly lease payments with option to purchase the home at a predetermined price within a certain timeframe.
Each alternative has its own pros, cons, eligibility requirements, and costs. Shop around to find the best fit for your financial situation.
The Bottom Line
Hopefully this guide gave you a comprehensive overview of first lien mortgage loans – from how they work to tips for securing the best financing deal. While the loan process involves paperwork, a knowledgeable loan officer can guide you through each step. Do your due diligence on the front end and you’ll be rewarded with smart financing and the keys to your new home.
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- A property lien can be either general or specific and voluntary or involuntary. A mortgage lien is a specific, voluntary lien.
- The priority of the liens on a property determines which debt will be repaid first in the event of default and foreclosure.
- The best way to avoid involuntary liens on your property is to make timely payments on the debts you owe.
Mortgage liens are an essential part of the process of buying a home. Here’s how mortgage liens work, the difference between voluntary and involuntary liens and how you can make sure your mortgage lien doesn’t become a problem.
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What Is a First-Lien HELOC?
FAQ
What is a first mortgage loan?
What is the difference between 1st and 2nd lien?
What is a lien on a mortgage loan?
Who is the typical first priority lien holder on a mortgage?
What is a first lien mortgage?
You might think that the term “first lien” references the residential mortgage on your first home. That’s not entirely true since it’s actually just the first mortgage on the property. For instance, if you have several mortgage loans on a single piece of property, the original loan is called the first lien or first mortgage.
What is a first lien HELOC?
A first lien HELOC is a line of credit and mortgage in one. They are considered open end mortgages. It often works by replacing your existing mortgage, taking over as first lien or first mortgage. But unlike a traditional mortgage, it also works like a checking account, similar to a home equity loan.
What is the difference between a first lien and a second loan?
For instance, if you have several mortgage loans on a single piece of property, the original loan is called the first lien or first mortgage. You might obtain a second loan if you want to complete some home-improvement projects or fund other expenditures through a home equity loan, and this involves borrowing against the home’s equity.
What is a first mortgage?
A first mortgage is a primary lien on a property. As the primary loan that pays for a property, it has priority over all other liens or claims on a property in the event of default. A first mortgage is not the mortgage on a borrower’s first home; it is the original mortgage taken on any one property. It is also called a first lien.