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First-Time Home Buyers’ Steps and Programs: A MoneyTips Guide

TLDR

What You Need To Know

  • First-time home buyers who qualify have plenty of government and nonprofit programs available to help them purchase their first homes
  • Understanding the home buying process ahead of time can demystify the steps involved in buying a first home
  • Getting a mortgage for the first time may feel intimidating, but first-time home buyers with good credit and a low debt-to-income (DTI) ratio should be able to qualify

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Determining Your Credit Score
  1. Your credit score is a three-digit number that’s used to predict how likely it is you’ll pay back money you borrowed.
  2. The score generally ranges from 300 (low) to 850 (excellent). It’s calculated by looking at your previous credit history.
  3. You can check your credit report to find the number or use a free credit tool. You can also plug in your best guess.

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Getting your first home loan can be challenging, and, sometimes, you may wonder if you’ve been left to struggle through the process on your own. Luckily, that’s not true. There is help out there. And many programs specifically offer financial assistance to home buying newbies.

What Are the Advantages of Being a First-Time Home Buyer?

First-time home buyers can take advantage of loans or programs that may not apply to people who already own a home. In many cases, first-time home buyers can qualify for lower down payments and various government programs designed to boost homeownership.

We’ll get into these programs and requirements in more detail, but first, let’s dive into the home buying process.

Questions To Ask Before Buying Your First Home

Buying a home is a big financial step. Before you launch into the home buying process, you should ask yourself a few questions. Your answers can help you make smart choices and help you understand how much home you can afford.

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What do your finances look like?

It’s one thing to browse real estate listings and pick out your dream home – but it’s another thing to qualify for it and afford it. Before you start house hunting, you need to take a serious look at your finances.

Crunch the numbers to see what you can afford as a monthly mortgage payment – and don’t forget to include your property taxes and homeowners insurance. If you make less than a 20% down payment, you may also need to pay mortgage insurance. If you buy a home that makes you part of a homeowners association, you’ll need to pay homeowner association fees. 

Your lender will also want to look at your debt-to-income (DTI) ratio. DTI measures your fixed monthly expenses (rent or mortgage payment, credit cards, student loan, auto loan or personal loan payments) against your gross monthly income. Most lenders prefer a DTI of 36%, though they may be willing to accept a DTI of up to 50% in certain situations.

What type of home do you want to buy?

You may have a traditional single-family home in mind as you start your search, but that’s not your only option. A condominium, a co-op, a townhouse or even a multifamily building where you live in one unit while you rent out the other units may be better suited to your needs and your budget.

What can you qualify for?

Find out the size of mortgage you can qualify for ahead of time by getting preapproved for a loan. You may need a preapproval letter from a lender before a buyer will entertain or accept your purchase offer. 

A preapproval letter will also help you figure out how much you can afford to pay for a home. In some cases, you may qualify for more money than you can afford to repay. So make sure you’re not overextending your finances. The goal is to find a home you love at a price that doesn’t hurt your wallet. 

Who will help you with the buying process?

You don’t have to navigate the home buying process alone. 

You can start with a mortgage lender and go from there. A mortgage lender will give you advice and is the best way to get connected with a real estate agent.

If you work with a real estate agent, your real estate agent will be with you every step of the way, from touring homes and making offers to negotiating a fair purchase price and handling all the paperwork. (And there’s a lot of paperwork!)

What Are the Steps to Buying a House for First-Time Home Buyers?

One of the key steps to buying your first (or any) home is getting a mortgage. We’ll review everything you’ll need to know about mortgage loans and mortgage lenders. And we’ll also point you in the direction of first-time home buyer programs that can help open the doors of homeownership for you. 

Get a mortgage loan

Mortgages aren’t monoliths. There are different types of mortgages to choose from – and each comes with its pluses and minuses. 

  • Conventional mortgages: Conventional mortgages are offered by most banks and other private lenders. Lenders typically prefer to work with borrowers who have FICO® scores of 620 or higher. Because their overall costs are lower, they are the most popular mortgage choice for borrowers.[2]
  • Jumbo loans: Jumbo loans are similar to conventional mortgages, but they are aimed at borrowers who are buying more expensive homes (typically in areas with a high cost of living). They often require higher down payments and FICO® scores, but their interest rates are competitive.
  • Government-backed loans: Government-backed loans are insured by different federal agencies, including the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the Department of Veterans Affairs (VA). They don’t require large down payments, and borrowers may qualify with lower credit scores. 

Your choice of mortgage will depend on many factors, including the type of property you want to buy, your finances and your credit score. The size of your down payment will also affect your ability to qualify for a particular mortgage.

Lenders typically prefer that borrowers make down payments that are at least 20% of a home’s purchase price. But for many first-time home buyers, that’s simply not possible. And that’s where mortgage insurance comes in.

Your lender will require that you take out mortgage insurance if you make a down payment that’s less than 20%. Mortgage insurance protects the lender in case the loan goes into default. And the insurance payments can be rolled into your monthly mortgage payments. Depending on the type of loan you take out, there are usually two types of mortgage insurance:

  • Private mortgage insurance (PMI): If you take out a conventional loan and pay less than 20% down, you’ll have to pay private mortgage insurance. It usually adds $30 – $70 a month for every $100,000 you borrowed to your monthly mortgage payment. You can typically stop paying for it once you’ve paid off 22% of the principal on your mortgage.[3]
  • Mortgage insurance premiums (MIPs): If you have an FHA loan, you’ll pay a mortgage insurance premium. MIP is divided into two payments. You pay the upfront premium at closing, which is 1.75% of the loan amount (that’s $1,750 for every $100,000 borrowed). Then you pay the annual premium, which is 0.80% – 0.85% of the loan’s value (that’s $800 – $850 per year per $100,000 borrowed or $67 – $71 per month per $100,000 borrowed). The annual premium is added to your monthly mortgage payment, and depending on your down payment, you’ll pay MIP for 11 years or the life of the loan.[4]

Find your house and make an offer

House hunting can be fun, stressful and rewarding all at the same time. But don’t expect to find your home right away. Most home buyers look for about 4 months before they find what they want. During that time, your real estate agent will be your best friend and your biggest help.

If the real estate market is a seller’s market (the demand for homes exceeds supply), you may find yourself making several offers before one gets accepted. Once your offer is accepted, you have about 45 – 60 very busy days ahead of you.

Get a home inspection and appraisal

Once your offer has been accepted and you’re in escrow, it’s time to have the home inspected and appraised. Home inspections, which can take a few hours, are top-to-bottom examinations of homes to make sure everything is up to code. If any problems are discovered, you can ask the seller to make repairs.

The home appraisal also happens during escrow. Your lender will schedule a professional appraiser to visit the home and assess its value so they can be sure the home’s purchase price lines up with its appraised value. 

Underwriting and escrow

During this time, you’ll have a lot of paperwork to handle. But don’t worry, your real estate agent will help you complete it. Your loan will also go through the underwriting process. The lender will take a deeper dive into your finances before they decide on approving your mortgage loan application. 

If your loan is approved, you’ll also find out how much the principal and interest will be on your monthly mortgage payment and determine what’s included in your monthly mortgage payment.

You can opt to add your property taxes to your monthly mortgage payment. In some cases, your lender may even give you a slightly better interest rate if you fold your property taxes into your monthly payments. But you can pay your property taxes on your own if you prefer. 

During escrow, you should also make arrangements for homeowners insurance, which you can also add to your monthly mortgage payments.

Close and get your keys

Once you get your loan approved and everything is finalized with the seller, it’s time for closing day. You’ll have to sign a lot of paperwork at closing and pay your closing costs. Buyers typically pay most closing costs, but the seller usually covers the commissions for both real estate agents.

Once you’ve signed the paperwork, you’ll get the keys to your new home.

Be aware that mortgage payments work differently from rent payments. When you pay your rent, you pay in advance. Let’s say your rent is due May 1. Once your payment posts, you’re covered for the month of May. 

Mortgages are paid in arrears. Your June 1 payment will cover the previous month (the month of May). You won’t make your first mortgage payment until the end of the month after you close escrow.

What First-Time Home Buyer Programs Are Out There?

You know that feeling when you’re staring at all the different ice cream flavors in the shop, and you’re trying to decide which one fits your mood? Well, finding loans and assistance programs for first-time home buyers is kind of like that. There are lots of options and figuring out which one to choose can feel overwhelming. 

To get you started, here are some mortgage loan and down payment assistance options that may be helpful for you as a first-time home buyer.  

First-time home buyer conventional loans

Conventional loans are the most popular type of loan in the U.S. and are offered by most lenders, like banks, credit unions and online lenders. A loan is a conventional loan if it meets the standards set by Fannie Mae and Freddie Mac. 

  • Fannie Mae HomeReady®: The program connects lower-income home buyers with good credit to closing costs and down payment assistance, including gifts and grants from nonprofits and government-based programs.[5]
  • Fannie Mae HomePath®: The program offers home buyers priority access to Fannie Mae-owned property listings. The listings are typically rehabilitated homes that were sold for less than their market value so the previous owner could avoid foreclosure.[6]
  • Freddie Mac Home Possible®: Under this program, home buyers pay as little as 3% down and buy condos, manufactured homes and multiunit properties.[7]
  • Freddie Mac HomeOne®: This mortgage product is only available to first-time home buyers. It allows home buyers to buy a primary residence with as little as 3% down. There’s no minimum required credit score, but most lenders prefer a credit score of 620 or higher.[8]

First-time home buyer government-backed loans

Government-backed loans are designed to give everyone, regardless of their financial background, an opportunity to enjoy the security, pride and wealth generation that can come with homeownership.

Most first-time home buyers who qualify for government-backed loans can take advantage of grants, down payment assistance and, sometimes, closing cost assistance.

Assistance with these costs can help boost your savings for the other expenses associated with buying a house.

Here are some popular government-backed loan options:

  • FHA home loans: FHA loans are available to everyone, but can be especially helpful for first-time home buyers. Borrowers may qualify for an FHA loan with a 500 credit score.[9]
  • FHA 203(k) home improvement loans: If you’re interested in buying a fixer-upper, an FHA 203(k) can help you get the money you need to purchase the home and cover the cost of repairs and improvements.[10]
  • USDA home loans: If you’re looking for a home in a designated rural area, USDA loans let you buy a home with 0% down.[11]
  • VA home loans: If you’re a qualifying service member, veteran or surviving spouse, you can use a VA loan to buy a home with little to no money down and there is no minimum credit score requirement.[12]

First-time home buyer nonprofit programs

Not sure you have enough income to buy a home? Carrying student loan and credit card debt? No worries. You don’t have to be rolling in money to get the keys to your first house.

There is a whole world of community nonprofits and home buyer education courses out there to help you become a homeowner.

They offer all sorts of ways to help make it easier to get a house. This includes help with closing costs, down payment assistance and grants (which are basically loans you don’t pay back). These loan programs can make a world of difference.

If you’ve got some big-time obstacles in your life, whether it’s money, health or anything else, check out these first-time home buyer programs:

  • Habitat for Humanity: Volunteers work with eligible families to help build safe and affordable homes. They also provide financial education to prepare you to own your home for a long, long time.
  • National Homebuyers Fund®, Inc.: NHF helps finance affordable housing with down payment and closing cost assistance as well as flexible loan options. Even if you don’t qualify, they’ll still offer free homeownership counseling.
  • Neighborhood Assistance Corporation of America: NACA offers extremely low-interest loans with no down payment, closing costs or fees. 

If you don’t end up qualifying for help from a nonprofit, there’s still hope.

Local, state and federal governments offer financial assistance and helpful first-time home buyer loans. Looking to move to an up-and-coming area? Well, these assistance programs are common in areas earmarked for revitalization.

First-time home buyer government programs

There are also federal home loan programs qualifying first-time home buyers can access.

  • Good Neighbor Next Door: The program offers teachers, firefighters, law enforcement officers and emergency medical technicians a 50% discount on the purchase price of a home in select revitalization areas.[13]
  • Energy-efficient mortgage (EEM): Several programs will lend you money to either buy an energy-efficient home or buy a home and finance improvements to make it more energy efficient.[14]

Qualifying for first-time home buyer government programs

Want to know if you’ll qualify for one of these government-backed programs? Each program comes with its specific requirements and standards, sometimes for the borrower and sometimes for the property.

Become a House Buying Pro on Your First Try

Your first time up to bat buying a house can feel intimidating. Following these basic steps can help you achieve homeownership. If you’re looking for ideas, your real estate agent is a great starting point for making sense of all of this. They’ll be able to point you to the right lenders and resources.

Home is worth it.

Take the first step toward owning a home. You’ll be glad you did.

  1. U.S. Department of Housing and Urban Development. “HUD Archives: HOC Reference Guide — First-Time Homebuyers (Page 3-02).” Retrieved March 2022 from https://archives.hud.gov/offices/hsg/sfh/ref/sfhp3-02.cfm

  2. Fannie Mae. “B3-5.1-01, General Requirements for Credit Scores (09/01/2021).” Retrieved March 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-1-Credit-Scores/1032996841/B3-5-1-01-General-Requirements-for-Credit-Scores-08-05-2020.htm

  3. Freddie Mac. “Pricing Out PMI – My Home.” Retrieved March 2022 from https://myhome.freddiemac.com/blog/homeownership/20190913-private-mortgage-insurance

  4. U.S. Department of Housing and Urban Development. “APPENDIX 1.0 – MORTGAGE INSURANCE PREMIUMS APPENDIX 1.0 – MORTGAGE INSURANCE PREMIUMS.” Retrieved March 2022 from https://www.hud.gov/sites/documents/15-01MLATCH.PDF

  5. Fannie Mae. “HomeReady Mortgage.” Retrieved March 2022 from https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homeready-mortgage

  6. Fannie Mae. “HomePath®.” Retrieved March 2022 from https://www.homepath.fanniemae.com/cfl/

  7. Freddie Mac. “Home Possible® – Freddie Mac Single-Family.” Retrieved March 2022 from https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/home-possible

  8. Freddie Mac. “HomeOne® – Freddie Mac Single-Family.” Retrieved March 2022 from https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/home-one

  9. Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved March 2022 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf

  10. U.S. Department of Housing and Urban Development. “203(k) Rehab Mortgage Insurance.” Retrieved March 2022 from https://www.hud.gov/program_offices/housing/sfh/203k/203k–df

  11. U.S. Department of Agriculture. “Single Family Home Loan Guarantees.” Retrieved March 2022 from https://www.rd.usda.gov/sites/default/files/fact-sheet/508_RD_FS_RHS_SFHGLP.pdf

  12. U.S. Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved March 2022 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

  13. U.S. Department of Housing and Urban Development. “HUD Good Neighbor Next Door Program.” Retrieved March 2022 from https://www.hud.gov/program_offices/housing/sfh/reo/goodn/gnndabot

  14. Energystar.gov. “Energy Efficient Mortgages.” Retrieved March 2022 from https://www.energystar.gov/newhomes/mortgage_lending_programs/energy_efficient_mortgages

ICYMI

In Case You Missed It

  1. Figure out how much house you can afford before you start the process to smooth the way toward mortgage approval

  2. First-time home buyers have access to government and nonprofit programs that can open the doors to homeownership

  3. People who haven’t owned a home in at least 3 years may qualify for first-time home buyer programs

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