Qualifying for a Mortgage as a First-Time Homebuyer


how to qualify first-time homebuyer

Many first-time homebuyers delay getting a mortgage because they’re worried they won’t qualify or don’t have the down payment.

This article takes an in-depth look at everything first-time home buyers need to know about how to get approved, the types of loans available, and the requirements to get a mortgage.

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Who Qualifies as First-Time Home Buyer

According to HUD, anyone who hasn’t owned a home in the past three years qualifies as a first-time homebuyer.

HUD’s Criteria for first-time homebuyers:

  • An individual or spouse who has had no ownership in a principal residence during the past 3 years.
  • A single parent who has only owned with a former spouse while married.
  • An individual who is a displaced homemaker and has only owned with a spouse.
  • An individual who has only owned a manufactured home

 

First-Time Homebuyer Requirements

Credit

A minimum 620 credit score is required for a mortgage except FHA and VA loans which you can be approved with a 580 credit score.

Generally, most mortgage loans require a credit score of 620 or higher. Lenders look at more than just your credit rating. Late payments and collection accounts could make it more difficult to get approved.

  • Bankruptcy – You can get a mortgage after a bankruptcy 24 months after it is dismissed, 12 months if you have extenuating circumstances.
  • Late Payments – You should not have any more than one late payment on any of your accounts in the past 12 months
  • Foreclosure – There is a 36 month waiting period after the dismissal of a foreclosure.
  • Collections, Judgements, and Federal Debt – Lenders may verify that judgments and Federal debt have been paid or on a payment plan.
  • Student Loans – 1% of your total student loan debt will be factored into your debt-to-income ratio.

 

Get a Copy of Your Credit Report

You can get a free copy of your report at annualcreditreport.com. This is a Government-run site that allows consumers to get a free copy of their credit reports once per year.

Check Your Report for Errors

Go through each item on your report to make sure there are no errors. If you find anything inaccurate, contact the credit bureaus immediately to file a dispute.

Debt-to-Income

The maximum debt-to-income ratio you can have for a conventional mortgage is 43%. Government home loans allow for up to a 50% DTI ratio making them ideal for low-income buyers.

Your debt-to-income ratio (DTI) is the amount of your income that goes towards your debt obligations. This includes credit card payments, car loans, and other loans and lines of credit.

For example, if your pre-tax income is $5,000 and your debt payments, including your mortgage loan, comes to $2,000, your back-end ratio is 40%.

Employment

You should have at least two years of stable employment with your current employer. If you have changed employers in the past two years but remained in the same industry, you will be fine. If you have bounced around from different employers in different industries, then you may run into issues.

Self-employed borrowers will need to provide two years of tax returns. Lenders will use the average annual income for your loan applications.

Income 

Income used for a home loan needs to meet the acceptable income standards for a mortgage. If you are self-employed or work on commission the average of your last two tax returns will be used.

Qualifying Income

  • Salary and hourly wages
  • Alimony and child support
  • Bonuses and commissions
  • Part-time employment
  • Disability benefits
  • Retirement, government, annuity, and pension income
  • Social security payments

First-Time Homebuyer Home Loans

Loan Type

Credit Score

Down Payment

Income Limit

FHA Loan

580

3.5%

NA

VA Loan

580-620

Zero down

NA

USDA Loan

640

Zero down

115% of AMI

203k Loan

640

3.5%

NA

Conventional Loan

620

5%-20%

NA

HomeReady /Home Possible

620

3%

 100% of AMI

Conventional 97

680

3%

NA

FHA Loans

FHA loans are perfect for first-time buyers because they require just a 580 credit score with 3.5% down. Buyers with a 500-579 credit score may qualify with 10% down. The maximum debt-to-income ratio is 43% to 50% and a mortgage insurance premium is required along with an upfront MIP fee of 1.75% of the loan amount.

  • Minimum 580 credit score (500+ with 10% down)
  • 3.5% down payment
  • 50% maximum DTI

 

Home Possible and HomeReady Loans

Fannie Mae and Freddie Mac created loan programs for low-income first-time homebuyers. HomeReady and Home Possible loans require a 3% down payment with a 620 credit score. Your income cannot exceed 100% of the area median income (AMI) to be eligible.

  • Minimum 620 credit score
  • 3% down payment
  • 50% maximum DTI
  • Income cannot exceed 100% of AMI

 

VA Loans

A VA loan is a mortgage loan for veterans guaranteed by the Department of Veterans Affairs. They require no down payment or mortgage insurance, making them the cheapest type of mortgage available today.

  • Minimum 580 credit score
  • No down payment
  • No mortgage insurance
  • Maximum 50% DTI

 

Section 203k Loans

If you’re interested in buying a fixer-upper where you buy a home that needs repairs. An FHA 203k loan gives you a loan for both the purchase of the property and the cost of repairs and home improvements.

  1. Minimum 620 credit score
  2. 3.5% down payment
  3. 45% maximum DTI

 

USDA Loans

The U.S. Department of Agriculture created the USDA loan program to help low-income buyers in rural areas of the country become homeowners. If you’re in a USDA eligible location, then you may qualify with no downpayment and a low mortgage rate of just 0.35%.

  • Minimum 640 credit score
  • No down payment
  • Maximum 50% DTI

 

Conventional Loans

If you have at least a 20% down payment, you should consider a conventional loan since no PMI is required with 20% down saving you thousands of dollars per year.

  • Minimum 620 credit score
  • 5% down payment
  • 43% maximum DTI

 

FHA Energy Efficient Mortgage (EEM)

The Energy Efficient Mortgage Program helps borrowers finance the purchase plus get additional funds to make energy-efficient improvements. The EEM program requires a 580 credit score with a 3.5% down payment.

  • Minimum 580 credit score
  • 3.5% down payment
  • 45% maximum DTI

 

Conventional 97 Loans  

Fannie Mae created conventional 97 loans to compete with the low down payment FHA loans offer. With just a 3% down payment and a 680 credit score, you can qualify for the conventional 97 loan program.

  • Minimum 680 credit score
  • 3% down payment
  • 43% maximum DTI

 

First-time Homebuyer Tips

Compare Loan Offers from Multiple Lenders

Don’t make the same mistake many buyers do by getting just going with the first lender you speak to without comparing mortgage rates with other lenders first.

Lenders will provide a loan estimate which breaks down the mortgage rate, closing costs, and other lender fees. You should speak to at least three different lenders to ensure you’re getting the best deal possible. You can also use the loan estimates to negotiate better loan terms with your preferred lender.

Get Pre-Approved

Before you start house hunting with your realtor, you need to get approved for a mortgage. To get pre-approved for a loan, you need to speak to a lender.

A loan officer will check your credit and verify your income and assets with your W2’s, tax returns, bank statements, and paycheck statements. Most realtors will not even start showing your houses before you have a pre-approval letter in hand. Most sellers won’t accept offers that do not come with pre-approval letters.

The process is quick and easy. Usually, you can be pre-approved in a matter of minutes.

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Have Your Documents Ready

Your lender will need many documents before you can close. Save time by organizing your loan documents and having them ready for your loan officer.

Documents Needed for Pre-Approval

  • Last two years of W2’s and tax returns
  • 30 days worth of paystubs
  • Three months of bank statements
  • Profit and loss statements if self-employed
  • Driver’s License

 

Down Payment Requirements

The amount of the down payment needed to buy a house will depend on the type of mortgage you get. First-time homebuyers typically have less money in savings than repeat buyers, which is why low and no down payment home loans are so popular. 

Down payments need to be seasoned and documented for the lender. The down payment needs to be in your savings account for at least two months, and you will need to provide your bank statements to your loan officer.

Down Payment Requirement by Loan Type

FHA Loan

3.5% - 10%

USDA Loan

No down payment

VA Loan

No down payment

203k Loan

3.5%

Conventional Loan

5% - 20%

Conventional 97 Loan

3%

HomeReady Loan

3%

Home Possible Loan

3%

Piggyback Loan

10%

Jumbo Loan

10% - 20%

Down Payment Gifts

The funds for the down payment can be a gift from a friend or family member. A down payment gift letter starting the funds are a gift and do not need to be repaid must be submitted.

First-Time Homebuyer Assistance Programs

There are many down payment assistance programs and grants for first-time homebuyers available. HUD has many local state programs that offer first-time homebuyers down payment assistance programs to buy a home.

You can also find local programs on your city or county website. Some of these programs may require you to take a homebuyer education class to be eligible.

Editor’s Note: The first-time homebuyer tax credit is no longer available.

HUD Programs for First-Time Homebuyers

Good Neighbor Next Door Program – The US Department of Housing and Urban Development created The Good Neighbor Next Door Program (GNND) to help teachers, law enforcement, emergency, and medical technicians become homeowners by offering 50% off the list price of HUD homes on hudhomestore.com.

One Dollar Program – The dollar home program is offered by HUD that allows local government to purchase HUD homes listed at $25,000 or less that have been on the market for more than 180 days for one dollar. These homes can be offered to low-income families to help revitalize the neighborhood.

Hire an Experienced Real Estate Agent

Some first-time buyers believe they can save money by buying a house without a real estate agent. Don’t make this mistake; the seller pays your real estate agent; the cost is already figured into the home price.

An experienced realtor will not only help you through the home buying process, but they will also negotiate on your behalf and look out for your best interest.

Budget for All Homeownership Costs

There are many costs involved with getting a mortgage loan besides the monthly mortgage payment. There’s homeowners insurance, mortgage insurance, property taxes, closing costs, and HOA fees.

To find out how much house you can afford with our home affordability calculator.

Closing Costs

Closing costs are fees charged by lenders for issuing and funding the loan. These fees usually come to 2% – 5% of the loan amount and are dependent on your credit score and the loan amount.

Mortgage Insurance

Mortgage insurance is required on every mortgage if you have less than a 20% down payment. Conventional loans will drop PMI once your loan-to-value ratio reaches 78%. MIP is required on FHA mortgages regardless of the down payment amount and may not drop off for 11 years or the life of the loan.

Property Taxes

Your local state and local government are charged property taxes, which will be factored into your monthly payment. Typically, your mortgage lender will set up an escrow account where a portion of your payment goes into paying the property taxes.

Homeowners Insurance

When you get a mortgage, homeowners insurance is required to be carried at all times. The average cost of hazard insurance is $1,000-$1,300 annually. The cost will largely depend on the estimated market value of the home.

Improve Your Credit Score Before Applying

Your FICO score is one of the most important factors for getting approved for a mortgage. Check your free credit scores and monitor your credit on Credit Sesame or Wallet Hub.

Get a Copy of Your Credit Report

The first thing you need to do is get a copy of your credit report from all three major credit bureaus. You can get a free copy of your report at annualcreditreport.com. This is a Government-run site that allows consumers to get a free copy of their credit reports once per year.

Check Your Report for Errors

Go through each item on your report to make sure there are no errors. If you find anything inaccurate, contact the credit bureaus immediately to file a dispute.

Errors to Look For

  • Current and previous phone numbers and addresses
  • Inaccurate account information
  • Accounts that do not belong to you
  • Late payments that should not be there
  • Credit injuries that you did not authorize

You can dispute incorrect information on your report by contacting the credit bureaus by phone, online, or in writing.

Frequently Asked Questions

Who is Considered a first-time homebuyer?

To qualify as a first-time buyer, you must not have had ownership in a home in the past three years.

Which loan is best for first-time homebuyers?

There is no one size fits all home loan for first-time buyers. But the most popular type of home loan used by first-time buyers are FHA loans. This is because of their low down payment requirement and the most relaxed guidelines to qualify.

What credit score do I need for an FHA loan?

The Federal Housing Administration will insure a mortgage if the borrower has a 500 or higher credit score and a 10% downpayment. If a borrower has at least a 580 credit score, they will ensure the loan with just a 3.5% down payment.

Is there still a first-time buyer tax credit?

The federal first-time homebuyer tax credit isn’t available any longer; however, some states offer tax credits you can use on your federal tax return.

The Bottom Line

Buying a house for the first time doesn’t have to be scary. Follow these nine tips and make sure you work with a great realtor and loan officer, and the process should run smoothly.

Check your credit score, hire a good real estate agent, compare loan offers from multiple lenders, and don’t apply for new credit during the home buying process.

As long as you follow all the tips in this article, you can achieve the American dream without headaches.

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