How To Qualify as a First-Time Homebuyer

You may think homeownership is impossible, but it may not be as far from your reach as you think. If you don’t know how to qualify as a first-time home buyer, then the first thing you should know is: Being a first-time homebuyer includes some exclusive perks that make it easier to purchase a home.

Knowing whether you qualify and how to qualify as a first-time homebuyer is half the battle, then comes understanding the advantages — like low-money-down or no-money-down loans and grants that often accompany the coveted first-time buyer status.

Buying a home can be overwhelming no matter what, and if it’s your first time buying, there is a lot to know. From how much you need for down payments to credit scores, let’s break it down.

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Why would I want to qualify as a first-time homebuyer?

First things first, there are major advantages of being a first-time buyer, including a number of nationwide programs and incentives geared toward first-time buyers that make homeownership more accessible. For example, both conventional and FHA loans offer first-time buyers the opportunity to purchase a home with only 3% down (conventional) or 3.5% down (FHA).

If you don’t have a lot of cash saved and you are a veteran or looking for a home a bit outside of the city, then you may qualify for no-down payment loans, such as a VA or USDA loan. VA loans also offer even more benefits, like better interest rates and less strident qualifications — but as the name indicates, they are only available to current military members or veterans (or their spouses).

USDA Rural Development loans also allow for 100% financing (or 0% down). Don’t let the name fool you: areas designated for Rural Development loans can be closer to cities than you might expect. One of the key eligibility factors is an area’s population size rather than the amount of rural land surrounding a house. Two big advantages to the USDA loan program are the ability to secure a low fixed interest rate with a very low down payment, even for borrowers with limited income and less-than-stellar credit.

Don’t forget to do your research and ask plenty of questions when talking to lenders and your real estate agent about local and state first-time buyer programs. Many offer down payment grants, no-down-payment mortgages, and low interest rates.

For example, “In my area, the Kentucky Housing Corporation offers several programs, like down payment and closing cost assistance,” says agent Gary Wantland of Bowling Green, Kentucky.

State programs vary, of course, but they provide another exciting opportunity for first-time home buyers to investigate.

When loan environments are riskier (like during an economic recession), it can be harder to get these kinds of loans. You may have a preapproval, but a preapproval does not guarantee formal loan approval.

During the coronavirus pandemic, for example, many lenders imposed overlays (an overlay happens when a lender sets extra qualifications on top of the industry-wide guidelines, making it harder to qualify for a mortgage). For a buyer, overlays could drastically alter your homebuying experience and possibly disqualify you from the loan you thought you could get.

For example, pre-pandemic, an FHA loan could be secured with 3.5% down and a minimum credit score of 580. During the pandemic, lenders could (and did) impose much higher down payment and credit score requirements. Wells Fargo raised the minimum credit score requirement to 680 for all government-backed loans, while JP Morgan Chase requires a minimum score of 700 for purchase loans and a 20% down payment for nearly all new  conventional mortgages.

It is worth noting that the FHA itself did not change any credit score requirements, so it is more important than ever to shop around for a mortgage.

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OK, it’s a good idea. How do I qualify?

If you’ve never purchased a home before, then you qualify as a first-time buyer — but here’s something you might not know: you can be a first-time home buyer more than once. This is one instance in which time is on your side.

“There’s a lot of misperception about what it takes to qualify,” says Alanna McCargo, vice president for housing finance policy at the Urban Institute. “People are confused by income levels, they think they made too much, or they don’t realize that they could have owned a home before to qualify.”  If you haven’t owned a home in the past three years, you can apply for a mortgage as a first-time buyer.

Even if your previous home was foreclosed, you can still qualify as a first-time buyer, but different lenders might ask you to wait longer than the three-year “first-time buyer reset” period. Zach Wain of Wain Capital says, ”Conventional loan programs require a 7 year waiting period from the date of foreclosure until you are allowed to get a new conventional loan.” Wain adds that FHA loans are less strict and enforce a 3 year waiting period and are more beneficial for home buyers that have average to below average credit scores.

It might also be a good idea to go through a pre-underwriting with a lender. Ryan Dibble, COO and former head of mortgage operations at Flyhomes, says “pre-underwriting is the only reliable answer to a big question: How much can I spend on a home? It’s a written commitment from a mortgage lender confirming the loan amount and program you’re qualified for.” This way you can shop for a home with confidence and avoid getting your heart set on a home that’s not quite within your reach.

How big of a down payment do you need to have?

The short answer is, it depends on the program.

Having cash on hand is one of the biggest hurdles to homeownership, but first-time buyers are eligible for some incredible programs that help lower your down payment amount. For a conventional loan, qualifying borrowers may only to put 3% down. Any buyer can find loans backed by the Federal Housing Administration (FHA) through traditional lenders, but they have special features that could be enticing to first-time buyers that have lower credit scores and relatively small savings. You’ll need to put 3.5% down for FHA loans.

There are also a number of down payment programs specifically for first-time buyers. Some are grants and some are loans; some will match your down payment amount up to a certain percentage, while others offer a flat lump sum to anyone who completes the program. They vary by state, and it’s a really good idea to look into which programs are available in your state … otherwise, you could be bypassing free money to supplement your down payment.

But just because you don’t have a lump sum of cash in a savings account, that doesn’t automatically disqualify you from purchasing a home. Wantland wants buyers to know: “there are some programs, like the USDA loan, that allow you to tie closing costs into the loan.” Meaning you can go to your closing with no cash in hand and still leave with your new house keys.

If you’re a veteran, VA-backed purchase loans also don’t require down payments.

Let’s talk about your credit

To put it simply, the better your credit score, the more loan options you will have and better interest rates. A score in the 700s or above is considered “excellent” and will likely secure a loan with the most favorable interest rate. Meeting credit score requirements is a must to qualify for no-down-payment or low-down-payment loans for first-time buyers.

Wain recommends meeting with a mortgage professional before you begin your house hunt. He says, “Home buyers should focus on increasing their credit score so they can get the very best conventional pricing possible, and meeting with a lender early in the process ensures time to explore ways to improve your credit score.

For conventional loans with a 3% down payment, you’ll likely need a 620 FICO score. For an FHA loan with a 3.5% down payment, you’ll likely need a 580 FICO score. There’s no official minimum for a VA loan, but you’ll likely need a FICO score between 580 and 620. And for a USDA loan, you’ll likely need a FICO score of 640.

How high is your income?

The step to qualifying as a first-time homebuyer is assessing your income and understanding how much money you need. You won’t be able to qualify for certain programs (such as USDA loans) if you make more than a certain amount of money. The amount varies by state and county, so don’t forget to investigate those limits or ask your lender.

Plus, certain programs have a certain debt-to-income ratio that you must fall under in order to qualify as a first-time buyer. If you have enough cash for a substantial down payment, maybe some of that cash could be used to pay off another debt, like a car or student loan, to bring your debt-to-income ratio down.

Wantland says, “The bottom line is: the numbers have to work for a buyer to qualify for one of these programs. Debt-to-income is as important as your credit score in a lot of cases.”

It’s also important to be mindful of the monthly expenses that debt-to-income ratio calculation doesn’t include, such as the cost of food, utilities, transportation, and health insurance. So keep these additional obligations in mind as you evaluate how much you’re willing to pay for housing each month.

When loan environments are riskier, you’re going to have to bring more to the table — a higher credit score, a bigger down payment, or lower debt-to-income ratio.  

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What’s the bottom line?

Despite the name, you don’t actually have to be buying your first home to qualify as a first-time buyer. Qualifying as a first-time homebuyer comes with some major advantages, but unless you have top-notch credit and a very low debt-to-income ratio, you won’t be able to qualify for every available program.

Finding a lender with excellent service is key. When shopping for a mortgage as a first-time buyer, most people focus solely on the numbers. But Dibble reminds buyers, “Make sure you choose a lender who is going to guide and advise you throughout the process, like a concierge. If the lender you’re considering is responsive, proactive, and pleasant to work with, that’s a good sign!”

Working with a real estate agent you trust is also critical for first time buyers. Working with an agent who knows the local market inside and out will work to your advantage. It’s not unusual for a lender to call agents, either, looking for buyers who may qualify for new opportunities that have recently become available. Make sure your lines of communication are open and honest — and don’t be afraid to ask questions — and you’ll be even closer to qualifying as a first-time homebuyer and finding your first home.

Header Image Source: (NeONBRAND / Unsplash)