First-Time Home Buyers Guide
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Buying your first home is a major milestone, but there's a lot to consider before calling your real estate agent. As a first time home buyer, you need to be able to qualify for a mortgage based on your credit score, income, down payment, and level of debt. You also need to make sure you're truly ready for homeownership and the costs that go along with it, including closing costs, property taxes, and ongoing maintenance and repair expenses.
If you're buying a house for the first time, this first-time home buyers guide will help you make sure you're making the right decision. You'll learn about how you get approved for a mortgage and key factors to consider before making your purchase. You'll also learn about first-time home buyer programs you can take advantage of and home loans ideal for first-time buyers. Let's dive in.
Your ability to qualify for a home loan depends on on these factors:
Government-backed loans, including loans guaranteed by the Veterans Administration (VA), Federal Housing Administration (FHA), and U.S. Department of Agriculture (USDA) tend to have easier qualifying requirements than conventional loans, which are not guaranteed by any government agency.
Minimum credit score requirements vary by lender for conventional loans. Most popular credit scoring models, including the FICO® Score, work on a scale of 300 to 850, and scores of 740 or above are considered to be very good or excellent.
Generally, most mortgage lenders like to see a score of at least 620, which is considered a fair credit score. To qualify for loans at the most competitive rates, you'd need a score of about 740 or higher.
Credit score requirements are lower for FHA, VA, and USDA Loans.
Mortgage lenders want to make sure you have enough money to pay your mortgage loan. To determine this, they look at both your income and your level of debt. There are actually two different debt-to-income ratios they consider:
Lenders want to know your source of income is stable. As a result, for both conventional and FHA loans, you'll need to show your income has been steady over the past two years. Tax returns, pay stubs, W-2s, and 1099s can all be used to demonstrate that you've had a consistent income. While there's more flexibility with VA and USDA loans, most lenders will still require that you show you've worked regularly.
If you have large gaps in your employment history, have changed jobs often, or have had wild fluctuations in your earnings, lenders may not be willing to count all your income when determining your debt-to-income ratio. Self-employed borrowers may also be subject to additional scrutiny when it comes to verifying income sources. This is because a salary from an outside employer is often seen as a more reliable source of income.
But as with other qualifying requirements, some lenders are more flexible than others in approving a loan without two years of steady earnings.
Ideally, a first-time home buyer would have enough money to make a 20% down payment on their home. This would mean you would need $40,000 if you were purchasing a $200,000 house. However, many borrowers fall short of this goal.
It is possible to get a conventional mortgage with as little as 3% down, although you may need a higher credit score or lower debt-to-income ratio. You can also qualify for a USDA or VA loan with no down payment or an FHA loan with just 3.5% down if your credit score is at least 580.
However, while VA loans don't require mortgage insurance, the FHA and USDA do. And conventional lenders require private mortgage insurance (also known as PMI) if you put down less than 20%. This insurance is an added cost to you and it protects lenders from losses if they must foreclose, but provides you with no protection if you can't pay your bill.
Many mortgage types allow you to use a down payment gift from close relatives or friends as part of your down payment. And some mortgage types, such as FHA, VA, and USDA loans, let you cover your entire down payment using a financial gift from someone else.
The two big benefits of being a first-time home buyer are potential financial assistance and more relaxed qualification requirements. For example, you could make a lower down payment or get approved with a lower credit score. First-time home buyer mortgage loans are designed to help regular people get over the initial obstacles to homeownership.
Down payment assistance might give you money towards your down payment and closing costs. It comes in three basic varieties: a non-repayable down payment grant, a forgivable loan, or a deferred-payment loan.
Here are some of the most popular home loan programs for first-time buyers.
Who it's great for: An FHA loan is a great option for a borrower who needs a low-down-payment mortgage. It can be especially helpful for someone with a lower credit score.
What it is: A mortgage loan insured by the Federal Housing Authority.
Where to find it: Most mortgage lenders offer these types of loans.
Who it's great for: A VA loan is for eligible service members, veterans, and some spouses. If you qualify, it's a great way to buy a home with little-to-no money out of pocket.
What it is: A home loan insured by the U.S. Department of Veterans Affairs.
Where to find it: Many mortgage lenders offer these loans, but a few make it their specialty.
Who it's great for: A USDA mortgage loan program is specifically designed for lower income families in rural communities.
What it is: A home loan insured by the U.S. Department of Agriculture.
Who it's great for: Fannie Mae and Freddie Mac home loans are for any potential borrower looking for help overcoming common obstacles to owning a home.
What it is: Fannie Mae and Freddie Mac are the home mortgage companies created by the federal government to insure mortgages. You can get Fannie and Freddie loans from your lender.
Both have loans designed to help first-time home buyers become homeowners. Here are a few examples of programs they offer:
Where to find it: Most of the best mortgage lenders offer one or more Fannie or Freddie home loans.
Who it's great for: The HomePath® Ready Buyer™ program is for first-time home buyers who are willing to take a homeownership education course.
What it is: A way to get up to 3% off closing costs.
Where to find it: Eligibility hinges on language that you will add to your purchase contract. It's a good idea to work with a real estate agent who is familiar with the program. If your agent isn't, you can get guidance directly from Fannie Mae via the HomePath website.
Who it's great for: The National Homebuyers Fund is for low- and middle-income buyers who want assistance with down payments.
What it is: A nonprofit organization that provides assistance with down payments in the form of gifts and forgivable loans.
Where to find it: Contact the National Homebuyers Fund at 866-643-4968 for a list of participating lenders.
Who it's great for: The FHA's EEM (energy-efficient mortgage) is great for energy-conscious home buyers who want to invest now for long-term lower utility costs.
What it is: A loan option for borrowers who want to finance energy-efficient improvements.
Where to find it: The request for an EEM has to come from the FHA lender. When you research lenders, ask if they can do an EEM.
Who it's great for: First-time buyers who have a lower income or for repeat buyers purchasing a home in a designated distressed area.
What it is: A nonrefundable tax credit equal to a portion of the mortgage interest paid, up to $2,000. This tax credit can reduce your federal tax liability. If your tax liability is smaller than your tax credit, you won't get a refund for the difference.
Where to find it: You will request the mortgage credit certificate from your state's Housing Finance Authority via an approved lender prior to your loan closing. Ask your lender about it while you're still shopping for a mortgage.
Who it's great for: State and local first-time home buyer programs and grants are for people who need help with their down payment and closing costs.
What it is: A mortgage program designed to lower barriers to owning a home by helping with the down payment, closing costs, mortgage insurance, or other common financial obstacles.
Where to find it: Most programs are run by the city or county. Start with your state's Housing Finance Authority, or search for your state on HUD's website and then look for the section called "Homeownership Assistance." Each program has its own requirements and approved lenders.
Who it's great for: The Good Neighbor Next Door program is a home-buyer assistance program for firefighters, law enforcement officers, teachers, and emergency medical technicians buying a home in a designated revitalization area.
What it is: A way to buy a single-family home for 50% off its appraised value and only $100 down.
Where to find it: You can find eligible homes on HUD's homestore website. From any listing, you can click the Find A Broker button to find a registered broker who can submit your offer. Each property is only available for seven days.
Who it's great for: Dollar Homes are for families with low-to-moderate incomes.
What it is: A way to buy a HUD home for $1 plus closing costs.
Where to find it: This program is administered by states. Check HUD to find available properties, and then click the Find A Broker button to make an offer. Dollar Homes are rarely available.
Who it's great for: The FHA Section 203(k) loan is for buyers who want to borrow extra money for renovations or improvements.
What it is: A home loan that covers both the purchase and the property rehabilitation.
Where to find it: You can use HUD's lender search tool to find a participating lender that has done a 203(k) loan in the last 12 months. This won't show you all approved lenders, but it will tell you whether the mortgage lender you want to work with has recent experience navigating this program. Enter the name of the lender and check the 203(k) box.
Who it's great for: The Native American Direct Loan is for Native American veterans and some spouses.
What it is: A low cost mortgage loan for Native American veterans who are members of participating tribes and buying a home on federal trust land.
Where to find it: First get a Certificate of Eligibility (COE) and then contact a VA home loan representative at 1-877-827-3702.
Here are the eligibility guidelines that apply to most first-time home buyer programs. You'll need to get specific requirements from any lender you apply with.
Use a mortgage calculator to figure out how much home you can afford as you get ready to apply. Remember that property taxes, homeowners insurance, homeowners association fees, private mortgage insurance, utilities, and maintenance are all expenses of owning a home. Whether you're looking for a condo in the city or a starter home in the country, these programs can help you step into home ownership with confidence.
Before buying a home for the first time, you need to make sure you're financially and personally prepared for the home-buying process. To make this decision, ask yourself these 10 questions.
There are many costs associated with buying and selling a home. Because of that, most experts agree it isn't a good idea to buy unless you plan to remain in the home for at least five years. Over that period, the home will ideally appreciate enough in value that you can recoup the expenses associated with its purchase and sale.
As mentioned above, lenders consider your credit score, debt relative to income, and employment history when determining if you are eligible for a loan. If you don't qualify for a mortgage, or if you qualify only for a loan with a very high interest rate, you may want to wait until you're in a better financial position before becoming a first time home buyer.
You can qualify for some types of home mortgages with as little as 3% down or with no down payment at all. But this usually isn't a good idea. There are added costs associated with taking out a mortgage loan that doesn't require a down payment, even with government-guaranteed mortgages such as FHA or VA loans. And not having a down payment puts you at risk of owing more money than your home is worth.
If you borrow enough to cover almost the entire price of the home, when you want to sell, it could be difficult to make enough money to pay off your full mortgage -- especially after accounting for real estate agent expenses and other closing costs. This could trap you in your home, even if you need to move because your financial or job situation changes.
A large down payment protects you from ending up underwater, which is what it's called when your mortgage is more than the value of your house. You ideally want a large enough down payment that your home is still worth more than you owe on it, even if the real estate market declines.
If you can save a 20% down payment, you'll be in a good position since you likely won't end up underwater and you can also avoid paying for private mortgage insurance or other fees.
Lenders want to see stable employment history, but it's also a good idea for you personally to make sure your income is reliable. You don't want to buy a home and become unable to make payments because you lost your job.
It can be difficult to predict what will happen with the real estate market. Still, you can look at factors such as how long homes are on the market and whether they're selling at asking price, or above it or below it, to assess whether it's a buyer's or seller's market. Use one of the real estate and home-buying apps to help you get a feel for your local market. If it's the right time for you to buy and you plan to stay put for a long time, it may not matter much. But ideally, you want to try to avoid buying when home prices are at their peak.
Most experts recommend you keep your housing costs below 30% of your income. If homes are very expensive in your area, it may not be feasible to buy without borrowing too much and becoming house poor. If you tie up too much of your money in your home, it could be difficult for you to save for retirement or accomplish other financial goals.
One way to save money on a home is to buy a starter home. These are generally smaller, less expensive homes. You may be able to afford the mortgage on a starter home, then upgrade to a larger home when your income is higher.
For most Americans, their mortgage is the largest debt they take on. Qualifying for favorable mortgage rates is important to avoid paying more than necessary.
When you borrow so much and pay it off over such a long time, even a small difference in interest rates can make a big impact. A $300,000 loan at 6.75% and 20% down would come at a total cost of $560,043 with monthly payments of $1,556 over 30 years, while the same loan at 7.25% would cost $589,281 with monthly payments of $1,637.
Closing costs are an inescapable expense when buying a home and they can total around 2% to 5% of the purchase price. Make sure you're prepared for all expenses of owning a home, including:
While some lenders allow you to borrow to cover some of these closing costs, if you do, you'd be paying interest on them over many years. It's often best to pay upfront if you can afford to do so.
Many experts recommend setting aside 1% of your home's value every year to cover repair costs. Others suggest budgeting $1 per square foot for maintenance and repair.
Whatever metric you choose, you need to be prepared to pay when things break. You also want to be sure you don't miss a mortgage payment due to a drop in income or an increase in your expenses.
An emergency fund helps you be ready for the responsibility of homeownership. Ideally, this fund will cover three to six months of living expenses (including your new mortgage payment). That will help ensure you're able to cover costs that arise after you've purchased your home. You can use our emergency fund calculator to determine how much you can expect to save.
Moving can be very expensive, especially if you're making a long-distance move. Make sure you have money to cover the cost of getting your possessions into your new home.
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
Most conventional mortgage lenders require you to have a credit score of 620. But you can qualify for loans guaranteed by the government with a credit score as low as 500 if you make at least a 10% down payment.
Ideally, you should put down at least 20% of the home's value as your down payment. This will allow you to avoid added costs associated with buying mortgage insurance to protect your lender. Making a larger down payment is also important so you have sufficient equity in your home and don't end up owing more on your loan than your house can be sold for.
First-time buyers may be eligible for loans with low down payments and with more relaxed qualifying requirements. There are national programs offered by Fannie Mae and Freddie Mac, as well as local programs you can find by visiting the website of your state's housing finance authority.
The amount you'll need to save for a first home will depend on the cost of the home you're purchasing and the type of loan you get. Ideally, you will have a 20% down payment for your home, so if you are buying a $300,000 home, you would save $60,000. You should also have money for closing costs, which can add up to around 2% to 5% of the purchase price of the home. Because homes come with other expenses such as maintenance and repairs, it's also a good idea to have an emergency fund available to cover unexpected expenses.
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