There are a lot of potential homebuyers that delay getting a mortgage simply because it seems like a long process, or they believe they will not qualify.
Qualifying for a home loan as a first-time homebuyer doesn’t have to be intimidating.
There are new mortgage programs available in 2018 that make it easier to qualify for a loan then ever before.
This article is going to show you show you everything you need to know to qualify as a first-time home buyer.
Rate Search: Get Approved for a Home Loan
1. Get a Copy of Your Credit Reports
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.
You will also need to know what your credit scores are. You can do this by going to these websites that give you your reports and credit scores completely free.
2. Check Your Report for Errors
Once you have pulled all three reports you need to go through each report to make sure there are no errors. If you find any errors you should contact the credit bureau immediately to file a dispute.
Errors to Look For
- Incorrect employers
- 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 inaccurate information on your report by contacting the credit bureau directly by phone, online, or in writing.
Tips for disputing your credit report with all 3 credit bureaus
3. Improve Your Credit Score
Your credit score is one of the most important factors when it comes to getting approved for a mortgage so it’s important to make your score is as high as possible before applying. Here are a few tips to help you increase your credit score quickly.
Pay down credit card balances – 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 cards limit.
Do not apply for new credit – Do not apply for new lines of credit, credit cards, or loans. When you apply for credit a hard credit inquiry is reported to the credit bureau which will lower your score, you’re also adding debt to your report which can negatively affect your scores.
Pay all your bills on time – It is always important to pay your bills on time, every time. But when you’re going to be applying for a mortgage soon it’s imperative you do not have any new late payments. Set up auto pay which all your bills so you ensure you stay on top of your bills.
4. Get Pre-Approved
Before you start house hunting you need to get pre-approved for a mortgage. In order 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.
5. Get an FHA loan
FHA loans are perfect for first-time buyers because they have less strict requirements making them easier to qualify for. They are the most popular type of loan for first-time home buyers because you just need a low 3.5% down payment with a 580 credit score to qualify.
FHA Loan Advantages
- 580 minimum credit score
- Low 3.5% down payment
- Down payment can be a gift
- Down payment assistance programs available
- Low interest rates
- Higher debt-to-income ratios accepted
6. Budget for All Homeownership Costs
There are many costs invoiced in getting a mortgage besides the house. There’s homeowners insurance, mortgage insurance, closing costs and HOA fees.
Mortgage insurance, or MIP is required for FHA loans regardless of how much money you use for your down payment. MIP on FHA loans is between 0.80% – 1% depending on the size of the loan and the amount you put down.
If you have at least 20% to put down you should look into a conventional loan. Conventional loans do not require private mortgage insurance (PMI) if you put 20% or more down.
To find out how much house you can afford use our calculator.
7. Know Your DTI Ratios
DTI is your debt-to-income ratio, it is the amount of your monthly income compared to your monthly debt payment obligations. This includes items such as credit card payments, car loans and all other loans.
Front-end DTI ratio is your ratio of income to debt payments before adding a mortgage loan.
For example if your gross income is $5,000 per month and your total payments comes to $1,000 per month you have a front-end ratio of 20%. The max this ratio should be is 28%.
Back-end DTI ratio is your income compared to your debt payments after factoring in the monthly mortgage payment.
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 41% or lower, however in some cases this ratio can be as high as 50%.
8. Check for First-Time Buyer Programs and Grants
There are many down payment assistance programs and grants for first-time homebuyers available. HUD has many local state programs that help first-time buyers come up with a down payment to buy a home.
You can also find local programs on your city or counties 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.