How to Get Approved for a First Time Home Buyer Loan

One of the biggest steps in young adult lives is when they buy their first home. The average age of the first-time home buyer is 33, and first-time buyers comprise about 1/3 of all US homeowners. But unlike people who have bought before, first-time purchasers don’t have equity to use to help with the down payment and closing costs for the next one. So, buying for the first time can be a bit more difficult than subsequent purchases.

Luckily, there are many first-time home buyer loans available that ease the purchase process for the first timer. Gone are the days where you had to always have a 20% down payment to get into your first home. If you are thinking about buying your first house, below is everything you need to know about first-time home buyer loans. If you have follow-up questions, our mortgage experts have you covered.

What Is a First-Time Home Buyer Loan?

first time home buyer loanA first-time homebuyer is a person who has never bought or owned a home.

However, the Department of Housing and Urban Development (HUD) also says that the following are considered key requirements for a FHA first-time home buyer loan:

  • Someone who hasn’t owned a home in at least three years after they sold their last one. If a married couple is purchasing a property, only one of them needs to have not owned a home in at least three years.
  • A single parent who owned a home with their ex when they were married.
  • A homemaker who has been displaced and only owned a home with their spouse.
  • Someone who has only owned a home that was not a permanent fixture on the land, such as a mobile home.

If you are in any of these categories, you may be able to get a variety of first-time buyer loans, potentially with down payment and closing cost assistance.

First Time Home Buyer Loan Requirements

In order to capitalize on these benefits, you must fulfill all prerequisites for a first-time home buyer loan, encompassing criteria such as income, credit score, and debt-to-income ratio. Additionally, you might qualify for a grant aimed at assisting with down payment and closing costs, particularly if you meet the requirements for a first-time home buyer loan. Credit scores should be at least 580 or higher.

  • Debt-to-income ratio should typically remain below 45%.
  • Down payment requirements necessitate at least 3% of the home purchase price.
  • Loan limits are in place to cap the maximum loan amount,
  • Income limits ascertain eligibility for individuals with moderate and low incomes.
  • Home purchase price limits vary by location, with maximum loan amounts set at $766,550 in most areas.

What Are First-Time Buyer Programs?

Depending on where you buy, there could be many home loan assistance programs for the first-time buyer. Some of the common options are:

  • Special mortgage programs: Many conventional lenders offer loans with 3% down, but occasionally, well-qualified buyers might find loans with zero down. Also, a government-backed mortgage could let you get approved with less money down, lower income, and a lower credit score. Our loan experts have many first-time home buyer programs with low down payment options.
  • Down payment help: Putting down 10% or 20% can be challenging when you don’t have equity from a previous home. But many communities and mortgage companies offer down payment assistance in the form of grants or loans. Grants don’t have to be paid back. If you get a loan, it usually doesn’t need to be paid off until you sell. Down payment assistance programs are a huge help to first-time buyers, so you don’t need to use all of your savings money to buy the house. Ask about home loans with no down payment.
  • Closing cost help: These programs may assist with closing costs, which can be 2% to 5% of the loan amount. Closing cost assistance also may be a loan or grant.

Federally Backed First-Time Home Buyer Loans

The US government offers several loan programs to assist first-time home buyers who may have difficulty qualifying for conventional mortgages. These mortgages can also be accessed by people who have owned homes before. These are the most popular government-backed home loan programs:

  • FHA: These loans are backed by the Federal Housing Administration. The FHA will pay back the bank if you don’t pay the loan, so the interest rates and qualifying criteria are reasonable. for most mortgage companies, the FHA has a 580 minimum credit score to have a 3.5% down payment. You have to pay mortgage insurance, usually for the life of the loan. Interest rates are competitive with market rates.  There are still a few companies that offer bad-credit first time home buyer loans.
  • VA: These loans are backed by the Veterans Administration and are for active and retired military and their spouses. You usually need a 640 credit score but there is no down payment required. Rates are lower than for FHA.
  • USDA These USDA loans are backed by the US Agriculture Department and are intended for low- and moderate-income rural home buyers. You must buy a home in a designated rural area. You may need a 640 credit score and no down-payment is possible.

These federally-backed loan programs are often a good fit for the first-time home buyer. Down payments are low and qualifying criteria are easier than conventional loans.

Fannie Mae And Freddie Mac First Time Buyer Programs

Fannie Mae and Freddie Mac are private government-sponsored enterprises or GSEs that back many conventional loans. They also provide lending standards for mortgage lenders. Depending on your finances and credit, you could qualify for one of these programs that often help first-time buyers. You generally need a 640 or higher credit score to qualify, and 680 and higher is preferred:

  • Freddie Mac HomeOne: A first-time buyer may get a 3% down payment and there is no income restriction. However, this loan is only for one-unit homes.
  • Freddie Mac Home Possible: This program works for first-time buyers, but you must have a yearly income that is 80% or less than the median household income in the area. You could have a 3% down payment, and it can be a loan or gift from your family. You can buy a property from one to four units, condominiums, and certain manufactured homes.
  • Freddie Mac HomeReady: First-time and other buyers with lower incomes can qualify for this program with a 3% down payment. You also have lower mortgage insurance requirements. You can use the HomeReady program with other closing cost and down payment help.
  • Fannie Mae HomePath Ready Buyer: A first-time homebuyer with income that is below the media income for the region can qualify. You can buy a Fannie Mae foreclosed home with only a 3% down payment. You also may be 3% closing cost help.

Down Payment Assistance Options

There are many down payment assistance options, depending on where you live. Many cities, states, and counties may offer first-time buyer down payment assistance in these programs:

  • Low interest loans: Some buyers qualify for a second mortgage for down payment help that is paid over several years.
  • Deferred payment loans: This may be a no-interest second mortgage that you pay when the home is sold or the first is refinanced.
  • Forgivable loans: This may be a second mortgage that you don’t need to pay back as long as you live in the home for a certain time.

You should look in your community for first-time buyer assistance programs for down payment help. Our loan advisors may be able to recommend available programs in your community.

How to Buy Your First Home

first time mortgage lendersNow that you want to buy your first home and have some ideas about financing options, let’s review the first time home buying process:

Look For A Home

This is the fun part of buying a home for the first time.

You should use all options to find the home you want and can afford.

Use a real estate agent, look at online listings, and drive around areas that you are interested in.

You also should check with friends and coworkers to see if anyone is selling a desirable home in your price range.

When you begin to seriously look at homes, such as going into an open house, it is better to already have a real estate agent. Working with the seller’s agent without your own agent can put you at a disadvantage.

Consider Financing

Once you have an idea of a home or type of home you want, you will need to secure financing. First-time buyers can choose from the many programs mentioned earlier in this article. You can expect a minimum down payment between 3% and 5%. Many first-time buyers go with an FHA loan with a 3.5% down payment, but others will use the Fannie or Freddie loans with a 3% down payment. Putting down more money is better because it will reduce your loan payment, but it can be difficult if you never owned a home before.

How Much Do You Want to Borrow?

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See Lenders for Terms and Conditions

If you need down payment help, keep in mind that a first-time homebuyer can take out up to $10,000 from the IRA without paying the 10% penalty. So, a couple could borrow $20,000 from their IRA and put it toward their down payment. Just know that if the money isn’t used within 120 days and you are under 59.5, you have to pay the 10% penalty.

First Time Home Buyer Mortgage Preapproval

You should check a variety of lenders to get the best mortgage deal as a first-time buyer. Our loan providers can give you many different options and programs, including FHA, VA, and many conventional loan programs. It pays to shop around because rates and fees can be different with different lenders, even with the same program. The FHA loan, for example, could have different rates and fees depending on if you get it from a large bank, local bank, mortgage bank, or broker.

Once you have decided on a mortgage lender, it will verify your credit and financial information. This process includes checking your FICO score, checking employment, determining your DTI, etc. Lenders typically pre-approve you for a certain amount of loan. Even if you get a mortgage preapproval, the loan still could fall through for various reasons. Make sure you maintain your credit score and don’t run up credit cards.

The mortgage preapproval letter from your lender will help as you look at various homes. The owner or real estate agent will want to see that you have been preapproved for a mortgage.

You may want to have a backup mortgage lender in case something goes wrong with your first lender. Having the backup mortgage lender that has also preapproved you can keep the deal going if something goes wrong with the first lender.

Make Your Offer

Once you have settled on the house, your agent will partner with you to determine what a fair offer is. Your real estate agent will make the offer to the seller’s agent, who will accept, reject, or make a counteroffer. You can go back and forth negotiating until you get a deal or decide to move on.

Before you make an offer on a house, look at your budget. Your closing costs will be 2% to 5% of the house price. You also will need moving funds and money for any immediate repairs or purchases, such as appliances.

Always Have The Home Inspected

Even if it is a new home and looks flawless, you should have a professional home inspection. You don’t want to buy a home that will require you to make tens of thousands in repairs to make it livable. If the inspection shows something that wasn’t disclosed to you, you can take back your offer and deposit. If you still want the house, negotiate with the home seller to make repairs or lower the price.

Closing

If you work out a fair price with the seller and the house meets your expectations, you can move on to closing. Closing involves signing a lot of paperwork at a mortgage or real estate offer and is where you get the keys to your new home. Congratulations!

How Long Does It Take To Buy Your First Home?

Buying a home might take a few days if you buy in cash. But it can take years for many first-time buyers. Without equity, you will need to save money for at least a year or two for a down payment and closing costs. Once you have enough money saved, you may have trouble finding a home in your price range that doesn’t get bought up quickly. Another variable is how active the housing market is when you are buying.

In 2024, interest rates are still elevated and it’s unclear when the Fed will begin cut rates. Inflation is still a problem, and there are fewer people buying and selling than a few years ago. If you are trying to buy your first home in this market, be patient and keep looking for a good deal. With higher first rate mortgage rates, you may need to buy less home than you anticipated. But it is only your first home, and you may be able to upgrade within a few years.

Summary on 1st Time Home Buyer Programs

Buying your first home is exciting, but it can also be stressful. Fortunately, there are many helpful mortgage programs out there for first time buyers. You probably won’t have to save as much money to buy the home as you thought. Our loan experts will give you plenty of mortgage options that will get you into your dream home soon!

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