Many first-time homebuyers delay getting a mortgage because they’re worried they won’t qualify or don’t have the down payment.
There are mortgage programs for first-time homebuyers that are easier to qualify for than conventional loans.
This article takes an in-depth look at everything first-time home buyers need to know about the home buying process.
Current Mortgage Rates (Novermber 2020) | ||
Loan Term | Interest rate | APR |
30-year fixed-rate mortgage | 3.15% | 3.38% |
15-year fixed-rate mortgage | 2.91% | 3.06% |
5/1 adjustable-rate mortgage | 3.05% | 3.25% |
First-Time Homebuyer Loan Programs
FHA Loans | FHA loans are perfect for first-time buyers because just a 580 credit score is needed with 3.5% down. 50% Maximum debt-to-income ratio |
Home Possible / HomeReady | 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. Borrowers' income cannot exceed 100% of the area median income. |
VA Loans | VA loans are for veterans, they require no down payment or mortgage insurance, making them the cheapest type of mortgage available today. |
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. |
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%. |
Conventional Loans | If you have at least a 20% down payment, then you should consider a conventional loan. since no PMI is required with 20% down savings you thousands of dollars per year. |
FHA Energy Efficient Mortgage (EEM) | The Energy Efficient Mortgage Program helps borrowers finance the purchase plus get additional funds to make energy-efficient improvements. |
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 Requirements by Loan Type
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 |
How to Qualify as a First-Time Homebuyer
You can actually be considered a first-time homebuyer if you have owned a property before. Most states will consider anyone who has not owned a property for the past three years, a first-time homebuyer.
Credit
580-620 credit score required for most types of mortgage loans.
Generally, most mortgage loans require a credit score of 620 or higher. However, FHA loans are available to borrowers with a 580 credit score. Lenders look at more than just your credit rating. Late payments and collection accounts could make it more difficult to get approved.
No Credit History | If you have no credit history then mortgage lenders ask for alternative credit lines, such as rent and phone payments to establish positive payment history. |
Bankruptcy | Bankruptcy will not disqualify you from a home loan. There is a 24 month waiting period after a chapter 7 bankruptcy, 12 months if you have extenuating circumstances. Borrowers must re-establish positive payment history post bankruptcy. |
Late Payments | A single late payment will not automatic disqualify you, however, you should not have anymore than one late payment on any of your accounts in the past 12 months |
Foreclosure | There is a 36 month waiting period after you have filed for a bankruptcy. Some borrowers may qualify in 12 months with extenuating circumstances. |
Collections, Judgements, and Federal Debt | Lenders may verify that judgments and Federal debt have been paid or on am agreed upon payment plan. Collections will not disqualify you, if your total collection debt is over $2,000 your lender may require you to make payment arrangements prior to closing. |
Debt-to-Income
Maximum 43% debt-to-income ratio, in some cases up to a 50% DTI Ratio is allowed.
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%.
This should be 43% or lower; however, the DTI ratio can be as high as 50% in some cases.
Employment
2 years employment with same employer for two years or in the same industry.
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.
Qualifying Income for a Mortgage |
• 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 |
• Trust income |
• Military income |
Compare Loan Estimates from Multiple Lenders
Don’t make the same mistake many first-time homebuyers do and get a loan with the first lender you speak to without comparing loan offers 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 pre-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.
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 a Mortgage |
• Last two years of W2's from all employers |
• Last two years of tax returns |
• 30 days worth of paystubs |
• Three months of bank statements |
• Profit and loss statements if self-employed |
• Driver's License |
• Divorcee decree (if applicable) |
• Bankruptcy paperwork (if applicable) |
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, 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 funds need 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% with 580 score (10% down with 500-579 score) USDA Loan No down payment VA Loan No down payment 3.5% Conventional Loan 5% - 20% Conventional 97 Loan 3% HomeReady Loan 3% Home Possible Loan 3%
Please note that any student loans will be factored into your debt-to-income ratio when calculating the loan amount you’re approved for.
Down Payment Gifts
The funds for the down payment can be a gift from a friend or family member for some types of mortgages. A 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: First-time homebuyers’ tax credit is no longer available.
Get Approved for a Home Loan Today
HUD Programs for First-Time Homebuyers
2020 First-Time Homebuyer Assistance Programs | |
Good Neighbor Next Door Program (GNND) |
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HUD Homes |
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Homeownership for public housing residents | Provides vouchers to first-time homebuyers to use towards purchasing a home |
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 not hiring a Realtor. Don’t make this mistake; the seller pays your real estate agent; the cost is already figured into the price of the home.
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 invoiced in getting a mortgage besides the house. 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 is 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.
Hazard Insurance
When you get a mortgage hazard 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 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.
Stay on Top of Your Credit During the Mortgage Process
Pay down credit card debt | Your credit utilization ratio is the amount of available credit you're using; it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the card's limit. |
Don't apply for credit | Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You're also adding debt to your report, which can negatively affect your score. |
Pay your bills on time | Your payment history accounts for 35% of your overall score. But when you're going to be applying for a mortgage soon. Don't miss a payment on any bills. Set up auto-pay with all your bills to ensure you don't have any late payments. |
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, many 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.
