The First-Time Home Buyers Guide



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.

Loan Type

Min Credit Score

Down Payment

Max DTI Ratio

Income Limit

FHA Loan

580

3.5%

43%-50%

NA

VA Loan

580-620

No down payment

50%

NA

USDA Loan

640

No down payment

50%

115% of area median income

203k Loan

640

3.5%

45%

NA

Conventional Loan

620

5% - 20%

43%

NA

HomeReady /Home Possible Loans

620

3%

50%

 80% of area median income

Conventional 97

680

3%

43%

NA

FHA Loans

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

Pros

Cons

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

VA Loans

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

USDA Loans

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%.

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HomeReady Loans

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)

  • Sells HUD-owned homes for 50% off to teachers, police officers, and EMT's

  • $100 down payment

HUD Homes

  • Buy foreclosed HUD real estate owned (REO) properties from the HUD Home Store website

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

Debt-to-Income

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%.

Down Payment

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.

Credit

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.

How to qualify as a first-time homebuyer

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.

Get Pre-Approved

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.

Speak to a Loan officer and Get Pre-Approved

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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