How to Qualify as a First-Time Home Buyer


BY Randall Yates

9 minute read

There are a lot of potential first-time homebuyers that delay getting a mortgage simply because it seems like a long and daunting process.

There are new mortgage programs available that make it easier for first-time buyers to qualify for a loan than ever before.

FHA loans are very popular because of their low credit and down payment requirements.

In this article, we are going to go over the different types of mortgage loan options for first-time buyers.

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First-Time Home Buyer Infographic

first time home buyer statistics

First-Time Home Buyers Love FHA Loans

The main reason FHA loans are so popular is because of their low down payment and credit requirements.

Borrowers who have bad credit with a 500 credit score may qualify for an FHA loan with a 10% down payment. However, with a FICO score below 580, it is highly unlikely a lender will be able to approve a borrower.

If you have a score under 580, we recommend working on improving your credit score before applying for a mortgage.

With a 580 credit score, just a 3.5% down payment is required for an FHA-insured mortgage loan.

FHA loan credit requirements

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10 First-Time Home Buyer Tips

first-time homebuyer infographic

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.

Check Your Report for Errors

Once you have pulled all three reports, you need to go through each item to make sure there are no errors. If you do find anything inaccurate, 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 incorrect information on your report by contacting the credit bureau directly by phone, online, or in writing.

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2. Check Your Credit Score

Your FICO score is one of the most important factors when it comes to getting approved for a mortgage, so it’s essential to make your score is as high as possible before applying.

You can get your score free online, but keep in mind that the score you see online is different from what lenders see. Check your score on these sites for free.

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 card’s limit.

Do not apply for new credit – Do not apply for new lines of credit, credit cards, or loans. When you apply for credit, it counts as a hard inquiry hard credit inquiry. Too many inquiries can 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 with all your bills to ensure you don’t have any late payments.

3. Get Pre-Approved Before House Hunting

Before you start house hunting, 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.

Documents You Need to Get Approved

  • Two years of tax returns
  • W2’s and Paycheck stubs
  • 2-3 months of bank statements
  • Proof of down payment

Please note that any student loans will be factored into your debt-to-income ratio when calculating the loan amount you’re approved for.

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4. See if You Qualify for an FHA Loan

FHA loans are perfect for first-time buyers because they have less strict requirements making them easier to qualify for. An FHA mortgage has a maximum loan-to-value ratio of 96.5%, meaning you just need a 3.5% down payment.

 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
  • Adjustable and fixed-rate loans available

5. Know Your Down Payment Options

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. FHA loans require just 3.5% of the purchase price as a down payment, making them an attractive option for first-time buyers.

If you do have at least 20% for a down payment, then you can avoid mortgage insurance by using a conventional mortgage.

Below are the down payment requirements for each type of home loan

  • FHA Loans – 3.5% with a 580 credit score
  • VA Loans – No down payment
  • USDA Loans – No down payment
  • 203k Loans – 3.5%
  • Conventional Loans – 5% – 20%
  • Conventional 97 – 3%

6. 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, your real estate agent is paid by the buyer; 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.

7. Budget for All Homeownership Costs

There are many costs invoiced in getting a mortgage beside the house. There’s homeowners insurance, mortgage insurance, property taxes, 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.

Property taxes are charged by your local state and local Government, 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 to pay the property taxes.

To find out how much house you can afford use our mortgage calculator

8. Know Your Debt-to-Income Ratio

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 come 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%.

9. Check for First-Time Home 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 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.

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HUD Programs for First-Time Home Buyers

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.

10. Know the Types of First-Time Buyer Loans Available

As a first-time homebuyer, you have more loan options than just an FHA loan. Depending on your situation, you may qualify for some other loan programs that offer advantages over FHA home loans.

Conventional Loan – If you have at least a 20% down payment, then you should consider a conventional mortgage. FHA requires mortgage insurance regardless of how much money you put down. If you have 20% down, then you would not be required to carry PMI saving you thousands of dollars per year.

Conventional 97 Loan – 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 program.

VA Loan – If you’re a Veteran, then you may qualify for a VA loan. VA loans require no down payment or mortgage insurance, making them the cheapest type of mortgage available today.

USDA Loan – The US Department of Agriculture has the USDA mortgage program that helps low-income buyers in rural areas of the country save money on a mortgage. If you’re in a USDA eligible location, then you may qualify with no downpayment and a low mortgage rate of just 0.35%.

203k Loan – If you’re interested in buying a fixer-upper, then there is a renovation FHA loan called a 203k loan. Where you can buy a home in need of repairs and get a loan for both the purchase of the property and the cost of repairs and home improvements.

Fannie and Freddie 3% Down Loan – Fannie Mae and Freddie Mac are the two largest buyers of mortgage loans. To compete with FHA loans, they launched a 3% down payment program called a conventional 97 mortgage.

FHA Energy Efficient Mortgage (EEM) – The Energy Efficient Mortgage Program helps borrowers finance the purchase of a home plus get additional funds to make energy-efficient improvements.

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First Time Home Buyer FAQ

Wh0 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.

In Conclusion

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 realtor, 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 any headaches.

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