How to qualify first time home buyer: Buying a home can be financially daunting especially if you’re a first time home buyer. But don’t despair—if you think you can’t handle the financial burden alone, there are various assistance programs available for you! In this article, we’ll help you know how to qualify, first time home buyer (or not) for first time home buyer loans available in your area.
In this article, we’ll look into first time home buyer programs you can apply for. Here we’ll also cover how to qualify (first time home buyer or not) when it comes to these assistance programs.
In a nutshell, here are the things you’ll learn in this guide:
- Who qualifies as a first time home buyer?
- What are the requirements for a first time home buyer loan?
- What is the maximum mortgage I can get based on my income?
- What factors do lenders take into account to calculate your mortgage amount?
- 7 First time home buyer programs and their requirements:
How to qualify for first time home buyer grants: FAQs
Before exploring what kinds of grants are available for you as a first time home buyer, let us first address a few frequently asked questions when it comes to how to qualify for first time home buyer grants.
Who qualifies as a first time home buyer?
By definition, a first time home buyer is someone who has not owned a house before. However, house ownership is only one of the criteria when it comes to being classified as a first time home buyer. Here are the others:
1. Non-home ownership. If you have been living in a place that isn’t attached to a foundation, like for instance an RV or a mobile home, you may qualify as a first time home buyer.
2. Property damage. Have you owned one property which has sustained some damage? If yes, you may qualify as a first time home buyer. However, the property must satisfy two conditions:
- It must be classified as ‘damaged’ according to local and state building codes
- Fixing your property must cost more than building a new property
3. Divorce. Individuals who become displaced from their spouses in any way (as in divorce or other settlements) may qualify as a first time home buyer. If this is you, you can qualify if:
- The only property (residence) you have ever owned was with your ex, and
- You must be a parent
What are the requirements for a first time home buyer loan?
Honestly, it depends!
Requirements for first time home buyers depend on the kind of programs/loans they are interested in. However, at a minimum, first time home buyers should have:
- A good credit score (this also depends on the kind of loan you’re applying for)
- At least 3.5% of the loan amount as a down payment (or have the down payment money gifted to them by a family member)
- Income requirements
Let’s talk about these in detail:
What kind of credit score do you need when it comes to how to qualify first time home buyer? According to experts:
- You will need at least a minimum credit score of 500 for eligibility just to qualify for an FHA (Federal Housing Authority) loan.
- However, a 580 score or higher is needed if you’d want to qualify for a 3.5% down payment on FHA.
- Overall, the required credit scores are variable—some lenders set the bar high, while others are more considerate.
- As a general rule, the better your credit score, the greater the chances you have at getting favorable interest rates and low down payments for your first-time loan.
- While lower credit scores may still entitle you to a first time home loan, you will have to endure more aggressive rates or higher down payment requirements.
As with the credit scores, the down payment requirements vary according to the program or the kind of loan you’re going for.
How much down payment for first time home buyers is needed?
- In 2018, first time home buyers are required to make a down payment of at least 3 to 3.5% of the appraised value of the property for an FHA loan.
- Other lenders require more—at least 10% if your credit score is under 580.
While most income requirements differ according to the lender, as an individual buying your first home, you will have to provide the following documents for your loan:
- Tax returns)
- Bank statements for all your accounts
- W-2 forms
- Employment verification from your employer (whenever applicable)
- Pay stubs
- Different credit reports
Bear in mind that the above is only the beginning—some lenders may require more, depending on their discretion.
What is the maximum mortgage I can get based on my income?
While income limits may vary, most lenders require a 45 to 50% debt-to-income ratio (DTI). This DTI simply means the comparison between how much you earn in a month versus how much you spend paying your recurring debts.
But then again, this range varies from one lender to another, so it’s important to do your research on this first before trying to apply for a first time home loan. The main point of these income limits is just to see whether you’re capable of paying your mortgage despite your other outstanding debts and expenses.
What factors do lenders take into account to calculate your mortgage amount?
Although you may have a rough idea on how much you can afford, the final mortgage amount depends on how much your lender thinks you can afford.
A few factors your lender may take into account when it comes to your mortgage amount include the following:
- Your loan to income ratio (this is usually capped at 4 ½ times your income)
- Your debt to income ratio or DTI (lenders usually prefer debt-to-income ratios below 50%; borrowers with lower DTIs)
- Your credit score (higher credit scores would mean lower interest rates)
- Your affordability assessment result (what you can afford to pay on a monthly basis given your current expenses and other outstanding debts)
How to qualify for first time home buyer programs (7 programs) and their requirements
Looking for the best first time home buyer loans? We’ve got you covered! Below is the list of 7 first time home buyer programs you’d like to consider and how to qualify as a first time home buyer:
1. USDA Loans
If living in a rural (or a suburban area) is an option for you, the USDA (United States Department of Agriculture) first time home buyer loan may be right for you! The USDA offers low-interest mortgages to low-income families (or individuals) for those who opt to live in rural areas in the US.
Benefits of USDA first time home buyer loans:
- Low interest
- It’s low to zero down first time home buyer loan
- Government funds your loan directly (lender is the USDA) which benefits most low to very low-income families
- If you have a credit score of 680 or higher, there’s likely less paperwork involved
- USDA loans are available in several kinds:
- Multi-family homes
- Guaranteed loans for buyers
- Direct loans
- Loans to upgrade homes
How to qualify first time home buyer: USDA Loan
- You can’t make more than 115% of the median income for the designated area where you intend to live
- You’ll need a credit score of 680 (or higher) for zero down payment
- For credit scores below 680, you may need to pay a 10% down payment (more or less)
- For more information, please visit the USDA website: www.rd.usda.gov
- The property must meet certain requirements (not more than 2,000 square feet)
- Owners can’t make income out of the property
- You’ll need to pay an upfront insurance premium of 1-2% plus a 0.35 to 0.40% monthly premium
2. FHA First Time Home Buyer Loan
Working with various lenders nationwide, the FHA (Federal Housing Administration) is able to ensure portions of loans so lenders feel more confident in offering the mortgages to individuals with not the best credit history.
As a first-time home buyer, this is one of your solid options since it offers more flexibility than other loans. Also, if you have trouble securing loans elsewhere, you are more likely to find assistance through this.
Benefits of FHA loans:
- They carry no prepayment penalty. You can pay larger amounts per month to pay off your loan quickly—and with no financial repercussions!
- Roll over upfront insurance and down payment. With FHA loans, you can roll over the down payment and the upfront insurance into the mortgage amount.
- Pay closing costs and down payment with gift money. Unlike others, FHA-backed lenders allow you to pay closing costs and down payments with gift money.
How to qualify first time home buyer: FHA Loan
- You’re at least two years out of bankruptcy
- Debt To Income (DTI) ratio is not more than 55%
- Your credit score is at least 580 (for an FHA loan with 3.5% down payment)
- If your credit score is below 580, you will have to pay a 10% down payment or more
- Private Mortgage Insurance. Paying a low down payment would mean you need to pay mortgage insurance premiums (PMI or private mortgage insurance)
- Closing costs. Although they are lower than traditional mortgages, you still need to pay closing costs when on an FHA loan.
3. VA Loans
For those in the military, you can benefit from VA loans from the Department of Veterans Affairs. In partnership with several lenders all over the country, VA loans are available for first time home buyers in lower rates than traditional loans.
Benefits of VA loans:
- Low interest
- Little to no down payment
- You can opt for an adjustable rate (ARM) mortgage or a fixed-rate mortgage for 15 to 30 years
- No Private Mortgage Insurance
- No prepayment penalty
- Rollover of the VA funding fee
How to qualify first time home buyer: VA Loan
You must be any of the following according to the VA’s website:
- Veterans with at least 90 days to 24 months of continuous service (depending on when you served)
- You’re on active duty now (for 90 continuous days)
- If you don’t meet the minimum requirements, you must be discharged for the following reasons:
- Reduction in force
- The convenience of the government
- Certain medical conditions
- Service-connected disability
- You’re a US citizen who served in the Armed Forces of a government who’s an ally of the US in WWII
- You served as one of the following:
- Cadet at the US Air Force, Military or Coast Guard Academy
- Public Health Service Officer
- Merchant seaman in WWII
- National Oceanic & Atmospheric Administration Officer
- US Naval Academy Midshipmen
- You’re a surviving spouse of a veteran, or a veteran who is missing in action (MIA) or being held as a prisoner of war (POW)
- VA funding fee. As an eligible VA borrower, you will need to pay a VA Funding Fee according to your current military status. This can be 1.25 to 2.24%.
- Other fees. You may need to pay appraisal and/or recording fees.
4. NADL (Native American Direct Loan)
First time home buyers with a Native American descent may apply for an NADL on homes/properties on ‘Federal Trust Land’.
Benefits of the NADL:
- VA sets the interest rate (that is usually lower than traditional loans)
- This is exclusive for individuals of Native American descent, so it’s great if you belong to one
How to qualify first time home buyer: NADL
- You’re a part of a tribe with MOU (Memorandum of Understanding) with the Department of Veterans Affairs
- You’re Native American, plus you’re a part of an Alaskan Native village or an American Indian tribe
- You’re married to a qualified individual
- You must apply for COE (Certification of Eligibility) for VA loan
This is exclusive to individuals part of a Native American/Alaskan tribe
5. HUD (Department of Housing and Urban Development) Good Neighbor Next Door Program
If you’re a public servant who is an asset to the community, you may take advantage of the HUD’s Good Neighbor Next Door (or Teacher Next Door) initiative.
Benefits of this HUD loan:
- Easier to find a property through this loan. In case there aren’t any eligible homes in your area or if you’re unable to win a bid for a property, the Teacher Next Door program will help you buy any property in the market.
- You can get the lowest price for your home
- You’ll get help with the paperwork
- You can get up to 50% discount off the list prices of homes in designated areas
- Low down payments
- No application fees
How to qualify first time home buyer: HUD Loan
- First, you have to be pre-approved for a mortgage; after pre-approval, your agent will help you find eligible listings in your area
- Teachers: full time, work in a state-accredited school (whether public or private), serving K to 12 students
- Police officers: full time, work in a tribal government that’s affiliated with the US government or work in government agencies
- Firefighters or EMTs: employed in the area where they want to purchase a property
- 36 months: Must agree to make the home their primary residence for 36 months
The program is highly competitive
6. Freddie Mac and Fannie Mae
Two of the biggest players in the mortgage industry, Freddie Mac and Fannie Mae, are also government-sponsored entities. They collaborate with local lenders to help first time home buyers like you and individuals with less than ideal credit scores.
Benefits of these loans:
- Low-interest rates
- Made for low to moderate income households
- Down payments can go as low as 3% of the loan amount
- You can cancel mortgage insurance if your home equity reaches 20%
How to qualify first time home buyer: Freddie Mac and Fannie Mae
- For a 3% low down payment, credit score must be 620 or higher
- Have low to moderate income
- First time home buyers (although if you’re a repeat home buyer you can still qualify for Fannie Mae’s HomeReady program)
- For more information, visit Fannie Mae’s website or Freddie Mac’s website
- Mortgage features for specific Freddie Mac or Fannie Mae loans may have additional requirements
7. State and local first time home buyer program
Apart from the loans described above, there are state-specific assistance programs available for you.
To help you out, you can check out this interactive map from the NCSHA (National Council of State Housing Agencies) which will help you identify first time home buyer programs (and their requirements) according to your state.
Having a house to call your own is one of the greatest things in the world, but sometimes, the process isn’t as straightforward or as linear as we think. Fortunately, there are assistance programs you can rely on to help you achieve your goal of owning a home for the first time.
While we’ve discussed 7 home buyer programs and how to qualify for them, there are still plenty of options for you out there. If you start your research now (whether online or by asking around), you may be able to find a suitable program to help you out in purchasing your first property.
If you’re a first time home buyer, this 15-step guide to buying a home could be a useful cheat sheet. If you’re planning to buy a home in the future, don’t forget to start monitoring your credit score as early as now to qualify for better mortgage loan terms.