How Can I Get a Mortgage for My First Home?
Buying your first home is an exciting milestone but navigating the mortgage process can seem daunting. With the right information and preparation, you can turn this dream into reality.
This guide is designed to help first-time homebuyers understand the essential requirements, explore available first home buyer programs, and discover first time home buyer tips for saving on your first mortgage.
Read on to gain the knowledge and confidence you need to get started on your journey to homeownership.
If you want to dive right into the homeownership journey, you can start by completing our Digital Mortgage Application - it’s quick and easy and can be filled out in about 10 to 15 minutes!
What is a First-Time Homebuyer?
A first-time homebuyer is an individual who is purchasing a primary residence for the first time. This term doesn’t specify age, so first time buyers can be in their 20s, 30s, 40s, or older.
The home doesn’t have to be a normal house; it could be a boat or another type of home that someone can live in full-time.
First-time time homebuyers can often get extra benefits, such as:
- Less expensive down payments
- Special grants
- Help with paying closing costs
Both state and federal governments provide these benefits. To attract first-time homebuyers, many lenders also offer incentives and special loan terms.
More: 10 tips for buying your first home
What are the Requirements and Qualifications for a First-Time Homebuyer?
Here’s a comprehensive overview of the first time home buyer qualifications to ensure you’re fully prepared for the home buying process.
Credit Score Requirements
One of the most important first time home buyer requirements will include assessing your credit score and credit history.
Here are a few programs and their typically minimum credit score requirements*:
- Conventional loans: Minimum credit score of 620.
- FHA loans: Minimum credit score of 580 (as low as 500 with a 10% down payment).
- VA loans: No minimum credit score required, though lenders may have their own requirements.
Having a higher credit score improves your chances at getting better loan terms and interest rates.
Down Payment Options
Contrary to common belief that a 20% down payment is necessary, many programs for first time home buyers offer much lower down payment options:
- Conventional loans: Options available as low as 3%
- FHA loans: Options available as low as 3.5%.
- VA and USDA loans: Are available with zero down payment options for qualifying applicants.
Debt-to-Income Ratio (DTI)
DTI (debt-to-income) ratio is a metric used by lenders to assess your ability to manage monthly payments and repay debts alongside your existing debt.
It is calculated by dividing your total monthly debt payments by your gross monthly income, and is expressed as a percentage.
The preferred DTI is 43% or lower, although some programs allow higher ratios.
Employment and Income Stability
Lenders prefer a stable employment history spanning the last two years. Also, it’s advisable to stay within the same working field for about two years which helps show employment consistency.
Overall, consistent and verifiable income reassures lenders of your ability to keep up with mortgage payments.
Credit History
Lenders review your credit history for responsible credit use. They’ll usually look at late payments, high credit card balances, and accounts in collections can all be red flags. You’ll want to make sure you have a clean credit history before applying for a mortgage for your first home.
Income Limits
Many first time homebuyer programs set income limits based on the Area Median Income (AMI) to help with moderate and low-income households.
Necessary Documentation
Here a few necessary documents you should have handy before applying for your first mortgage:
- Two years of tax returns and W-2s
- Bank statements
- Information on any additional assets
Available First-Time Homebuyer Grants, Programs, & Loans
There are many grants, programs, and loans available to make the process more affordable for first-time homebuyers. Here’s a look at some popular options:
Federal First-Time Homebuyer Programs & Loans
1. Federal Housing Administration (FHA) Loans:
FHA loans typically require applicants to meet these standards:
- Lower credit score requirements and reduced down payment options.
- Minimum credit score of 580 with a 3.5% down payment option. If your credit score is between 500-579, you may still qualify with a 10% down payment option.
- Offers flexibility for those with lower credit scores and smaller down payment options.
2. U.S. Department of Agriculture (USDA) Loans:
Here are some of the requirements to get a USDA loan:
- Designed for rural and suburban homebuyers.
- No down payment option is required if household income must not exceed 115% of the median income for the area.
- Zero down payment options and competitive interest rates.
3. Department of Veterans Affairs (VA) Loans:
Here’s what a VA home loan offers and who can take advantage of these loans:
- Available to military members, veterans, and their spouses
- Reduced rates, zero down payment options, and no minimum credit score requirement.
- No private mortgage insurance (PMI) and lower closing costs.
4. Fannie Mae and Freddie Mac Loans:
What you should know about Fannie Mae and Freddie Mac loans:
- Conventional loans with down payment options starting as low as 3%.
- Programs such as HomeReady** (Fannie Mae), Home Possible*** (Freddie Mac), and HomeOne**** (Freddie Mac) offer flexibility for low-income borrowers.
Additional Federal Grants and Programs
- Good Neighbor Next Door: Offers up to 50% off the price of homes in revitalization areas for police officers, firefighters, teachers, and EMTs.
- Dollar Homes: Provides foreclosed homes at reduced prices to low- and moderate-income families.
- Mortgage Credit Certification Program: The MCC program from the National Council of State Housing Agencies (NCSHA) is geared towards helping lower-income households obtain homeownership. This program is only offered to first time home buyers, as a tax deduction, for some of the mortgage interest paid per year - up to a certain amount.
- Section 184 Indian Home Loan Guarantee Program: Provides loans to Native Americans with down payments as low as 2.25%.
State and Local Government Programs
Many states and local governments offer grants, down payment assistance, and special loan terms. Examples include:
- Down Payment Assistance Programs (DPAs): Grants or low-interest loans to cover down payment and closing costs.
- The Chenoa Fund: Offers 3.5% down payment options, structured as a zero-interest second mortgage.
- Community Seconds: Fannie Mae program for down payment and closing cost assistance.
Nonprofit and Employer-Sponsored Programs
1. Neighborhood Assistance Corporation of America (NACA):
- Low-rate mortgages with no down payment, no closing costs, and no PMI.
- Homebuyer workshop and meet with a NACA counselor required
2. National Homebuyers Fund (NHF):
- Offers down payment and closing cost assistance up to 5% of the mortgage loan amount.
3. Habitat for Humanity:
- Builds affordable homes for low-income families who contribute sweat equity.
4. Employer-Assisted Housing (EAH) Programs:
Housing assistance to employees, including forgivable loans and homeownership education.
To find a full list of options, you can check out more on first time home buyer programs and resources here!
Who Qualifies for First-Time Homebuyer Programs?
Renters:
If you have been renting and have not owned a home in the past three years, you qualify as a first-time homebuyer. These programs are tailored to help renters in transitioning to homeownership by offering support such as lower down payments and closing cost assistance.
Single Parents and Caregivers:
Single parents who previously owned a home with a former spouse can still qualify, even if their name remains on the deed or mortgage. Similarly, caregivers who have left the workforce to care for a family member can find support through these programs.
Investment Property Owners:
Owning an investment property does not disqualify you. If you have not owned a primary residence for at least three years, you remain eligible for first-time homebuyer programs.
Mobile Home Owners:
Individuals who own a mobile home but have not owned a traditional home on a permanent foundation also qualify. First time homebuyer programs usually acknowledge the difference between mobile and traditional homeownership.
Target Area Buyers:
Individuals looking to purchase homes in designated target areas may benefit from more lenient qualifications and incentives aimed at revitalizing neighborhoods. These programs often offer reduced home prices or tax incentives to encourage homeownership in these areas.
What Else Can I Do to Save on My First Mortgage?
Buying your first home is a significant investment, and finding ways to save on your mortgage can make a big difference in your financial well-being. Here are some strategies to help you save money on your first mortgage:
1. Shop Around for the Best Mortgage Rate
Different lenders offer varying interest rates and terms, so it's crucial to shop around. Collect quotes from at least a few mortgage lenders to compare rates, fees, and loan terms. Securing a lower interest rate can save you thousands of dollars over the life of your loan.
2. Negotiate Your Mortgage Terms
Some lenders may be willing to negotiate the interest rate or origination fees. Use loan estimates from multiple lenders as leverage to negotiate better terms. Reducing your interest rate or origination fees can lower your overall mortgage costs.
3. Consider Adjustable-Rate Mortgages
ARMs typically offer lower initial interest rates compared to fixed-rate mortgages. Compare the potential savings of an ARM with the stability of a fixed-rate mortgage, especially if you plan to sell or refinance before the rate adjusts.
Lower initial payments can provide significant savings if you do not stay in the home for many years.
4. Work with Knowledgeable Professionals
Real estate agents and mortgage brokers can provide valuable advice and help you navigate the home-buying process. Choose professionals who specialize in first-time homebuyers to ensure you get the trustworthy guidance and the top deals for your financial situation.
Expert advice can lead to better decisions, potentially saving you money and avoiding costly mistakes.
RateReduce Program
The RateReduce Program is designed to help both buyers and sellers by making mortgage payments more affordable through a buydown process. This program offers different options to temporarily or permanently reduce the interest rate on a mortgage, helping our clients lower their monthly payments. Here’s how it works:
What is a Buydown?
A buydown is a financing technique where the seller, or sometimes the builder in the case of new constructions, pays an upfront fee to lower the buyer's mortgage interest rate for a certain period or for the life of the loan. This concession is paid during closing and must be included in the purchase contract.
Types of Buydowns in the Rate Reduce Program
- Rate Reduce Temp: Reduces the interest rate on your mortgage for the first few years.
- Rate Reduce Perm: Offers a reduced interest rate for the entire term of the mortgage
OneDown Program
The OneDown Program is designed to make homeownership more accessible by significantly reducing the required down payment. Here's how it works and what you need to know:
Key Features of the OneDown Program are as follows:
- Minimal Down Payment Requirement: Buyers are only required to contribute 1% of the purchase price as a down payment from their own funds.
- Down Payment Assistance: The program provides a grant of $2,000 or 2% of the purchase price (whichever is lower) to help with the down payment. To qualify, the buyer’s income must not exceed 80% of the Area Median Income (AMI). For example, in the Chicago area, this would be up to $84,560.
- Additional Support for Lower Income: Buyers with an income at 50% or lower of the AMI can receive up to a $2,500 grant.
- Eligibility Criteria:
The program is available for the purchase of single-unit primary residences.
Applies nationwide but requires that the property type and buyer’s income meet specific criteria.
At least one borrower must complete a Homebuyer Education course if all occupying borrowers are first-time homebuyers. - Additional Benefits:
Closing Cost Credit: The program includes a $1,000 credit towards lender fees at closing.
Lower Mortgage Insurance: Borrowers can benefit from lower cost mortgage insurance compared to similar loan types.
Flexibility with Gift Funds: Buyers can use gift money from friends or family to supplement their down payment.
These programs are designed to help borrowers make the most out of their homebuying experience!
How Can I Apply for My First Mortgage?
Getting a pre-approval can help you get started on the path to getting your first mortgage. Not only does a pre-approval narrow down your price range but it also strengthens your offer when you find your dream home.
Rate has Same Day mortgage options, which means we can help you close on your new home in as little as 10 days.
Ready to take the next step toward homeownership? Begin your journey by getting pre-approved for a mortgage. Complete our digital mortgage application to understand your home affordability options and secure a competitive rate!
First Time Homebuyer Loans FAQs
1. What is the difference between pre-qualification and pre-approval for a mortgage?
Pre-qualification is an initial assessment based on your self-reported financial information. It gives you a general idea of how much you might be able to borrow. Pre-approval, on the other hand, involves a more thorough evaluation of your financial background, including a credit check and verification of your income and assets. Pre-approval provides a specific loan amount and shows sellers you are a serious buyer.
2. How long does the mortgage approval process take?
The mortgage approval process can vary, but it typically takes between 30 to 45 days from application to closing. Factors such as the lender's efficiency, your financial situation, and the completeness of your documentation can influence the timeline. With our Same Day mortgage options, this period could be shortened significantly.
3. What costs are involved in obtaining a mortgage aside from the down payment?
In addition to the down payment, you should be prepared for several other costs, including closing costs (which can range anywhere from 2% to 5% of the loan amount), home inspection fees, appraisal fees, property taxes, homeowners insurance, and private mortgage insurance (PMI) if your down payment is less than 20%. It's crucial to budget for these expenses to avoid surprises.
4. Can I use gift money for my down payment?
Yes, many mortgage programs allow you to use gift money for your down payment, provided it comes from a relative, close friend, employer, or charitable organization. Lenders typically require a gift letter from the donor confirming that the money is a gift and not a loan. Be sure to check with your lender about specific requirements and limitations related to gift funds.
* If Applicant self-reports credit score as “needs improvement,” Rate, Inc. will not run credit or provide credit scores via the Digital Mortgage. Applicant may request credit scores by contacting Rate, Inc.
** The HomeReady Mortgage is available to borrowers with 80% or less of area median income for purchase or limited cash-out refinance transactions on one to four unit properties. Additional property restrictions and minimum borrower contribution requirements apply and vary based on number of units of subject property. Occupant borrowers may own one other financed residential property in addition to subject property at the time of closing. Minimum FICO score requirements apply. Up to six months of reserves may be required based on the factors of borrowers' eligibility including but not limited to credit score, debt to income, and loan type. If all co-borrowers are first time homebuyers or when using non-traditional credit to qualify then at least one borrower will be subject to additional requirements regarding homeownership education or counseling from an approved source. Applicants subject to credit and underwriting approval. Not all borrowers will be approved. Restrictions apply. Contact your loan officer for more information and to determine your eligibility.
*** Eligible borrowers must make less than 80% of Area Median Income. Available for first lien conventional mortgages for purchase and no cash-out refinances of owner occupied primary residences including condos, co-ops, and manufactured homes with additional requirements. Minimum down payment and FICO score requirements apply. Homeownership education may be required depending on transaction details. Applicants subject to credit and underwriting approval. Additional restrictions apply.
**** For more information about the HomeOne® program, please visit freddiemac.com or speak with your loan officer
Rate, Inc.is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.