What do buyers need to know and do to get great home loans and make their dreams of homeownership a reality?
Here are some tips for first-time homebuyers ready to buy a home of their own.
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First-Time Homebuyer Loan Programs
There are several types of first-time homebuyer loan programs that require little to no money down. It’s important you know which type of home loan is the best fit for your situation.
Min Credit Score
Max DTI Ratio
No down payment
No down payment
115% of area median income
5% - 20%
HomeReady /Home Possible Loans
80% of area median income
FHA home loans are a type of government home loan that is guaranteed by the Federal Housing Administration. They have low down payment and credit score requirements making them a favorite with first-time homebuyers.
FHA loans have the lowest credit score requirement of any mortgage. Borrowers with a 500 credit score, you could qualify with a 10% down payment. If you have a 580 credit score, you could qualify for FHA with just a 3.5% down payment.
Pros and Cons of FHA Loans
• Low credit score requirements
• Lower loan limits
• 3.5 percent down payment
• Includes upfront MIP fee
• Low interest rates
• MIP required for the life of the loan
• Easier to qualify for
• Strict underwriting requirements
• Down payment can be a gift
• For primary residence only
• Fixed and adjustable-rate loan options
• Up to 50% Debt-to-income ratio
• They are assumable
• Seller can pay up to 6% of closing costs
One of the greatest benefits of being a veteran of the U.S. military is the VA home loan program guaranteed by the U.S. Department of Veteran’s Affairs. Eligible veterans don’t need a down payment, and mortgage insurance is not required.
VA Eligibility Requirements
• Active-duty service member
• Current or former activated National Guard or Reserves
• Surviving spouse
• Discharged member of the National Guard or Reserves and never activated
• Discharged member of the National Guard and were never activated
The U.S. Department of Agriculture guarantees USDA loans. To be eligible, you must buy a home in an eligible rural location and meet the USDA income requirements. A USDA mortgage finances 100% of the purchase price. And even roll closing costs into the loan, so very little money is required upfront at closing.
USDA mortgage loans are also one of the cheapest loan programs available because the USDA mortgage insurance premium is the lowest of any government home loan at just 0.35%.[wptb id="11301" not found ]
Fannie Mae created the HomeReady loan program for low-income first-time homebuyers. Eligible borrowers must be a first-time homebuyer, meet the income limits, and have a 620 credit score. They require just a 3% down payment, even lower than the 3.5% required for an FHA loan.
Home Possible Loans
The Home Possible Loan Program is Freddie Mac’s version of the HomeReady loan. First-time homebuyers whose income is below 100% of the area median income are eligible.
Home Possible / HomeReady Loan Benefits
• 3% down payment
• Up to 50% DTI ratio
• Alternate income sources accepted
• Fixed mortgage payments
• Low mortgage insurance premiums
• PMI not required once LTV ratio reaches 78%
First-Time Homebuyer Assistance Programs
There are many great first time home buyer grants and programs available. Many offers deals with low or no down payments, low credit score, and income requirements.
HUD offers first-time homebuyer grants and programs depending on the state you are buying the property in. Just go to the HUD website and enter the state you’re buying to see what types of grants they have in your area.
Local Governments also offer a variety of home buyer grants and down payment assistance programs. Just go to your county website and search for homebuyer assistance.
2020 First-Time Homebuyer Assistance Programs
Good Neighbor Next Door Program (GNND)
Homeownership for public housing residents
Provides vouchers to first-time homebuyers to use towards purchasing a home
- Good Neighbor Nextdoor – The Good neighbor, next door program sells HUD homes to eligible teachers, police officers, and EMTs for 50% off the price listed on the HUD website.
- HUD Homes – You can search for foreclosures on the Hud Homestore website. HUD homes are properties that have been foreclosed on by borrowers who had a government-backed loan.
How to Qualify
Your debt-to-income ratio is the amount of your monthly income to goes towards your monthly debt obligations. The maximum DTI ratio for most types of home loans is 43%. Some government home loans, such as FHA and USDA loans, allow for higher DTI ratios as high as 50%.
Unless you qualify for a USDA or VA loan, you will need at least 3% to put down. This money must come from your own funds and cannot be a loan. You may also have the down payment gifted to you from a friend or family member.
Your credit rating is the biggest factor in determining whether or not you qualify for a mortgage. Most lenders require at least a 620 credit score to be eligible, but some lenders can accept a 580 credit score. You should pull a copy of your credit report and scores online to see where your score stands.
Income and Employment
You need to have at least two years of steady employment to qualify. If you are a commission-based employee, the average of your last two years’ tax returns will be used for your income.
First-Time Homebuyer Tips
Check your credit report.
Before you start the home buying process, you need to know your credit scores. Credit is the most important factor a lender looks at when determining if they will approve a mortgage.
You can get a free copy of your credit report once a year at www.annualcreditreport.com.
Before you start looking at homes with a real estate agent, you will need to get a pre-approval letter from a mortgage lender.
A pre-approval means a lender has pulled your credit report, verified your income and down payment, and you meet the requirements for a loan up to a certain amount. Once you have your pre-approval letter, it’s time to start looking for homes.
Work with a Real Estate Agent
It would be best if you worked with a knowledgeable real estate agent in your area. This is especially true for first-time homebuyers.
The cost for agents is already figured into the cost of a home. A Realtor’s commission is not paid out of your pocket; the seller pays the fee to their agent, as well as yours.
Some people think they can cut out the realtor and negotiate a lower purchase price, but this is not true. It will often end up costing you more money if you choose to go through a real estate transaction on your own.
Maximize your credit scores
The higher your credit score is, the better chance you will get approved, and the lower your interest rate will be. Make sure your score is as high as it can be before applying with a lender. Here are some things to make sure you’re maximizing your credit scores.
- Dispute any errors on your report
- Pay down the balances on your credit cards
- Have someone add you as an authorized user
- Negotiate pay for deletes with any accounts in collections
Where to Get Started
There are several websites out there that allow you to search for available homes, Trulia and Zillow, to name a few. You can view some of the top-rated real estate websites on Consumer Affairs has ranked the top real estate websites.
You will also need to speak with a mortgage lender to get pre-approved.
Are you ready to buy your first home?
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