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First-Time Home Buyer Loans - What are the Steps to Buying a House?

Are you hunting for your dream home for the first time, but you don't know where to start? The home buying process can be pretty challenging for a first-timer since there are many requirements, tasks, and steps to buying a house.

On the bright side, you get to enjoy certain benefits set to encourage new people into the competitive housing market.

You don't have to be an expert to find your way through the steps to buying a house, whether you're doing it for the first time or not.

However, you need to learn the basics to reduce the time and stress of the entire purchase. With the correct information at your fingertips, you improve your chances of getting a cost-effective deal on a first-time home buyer loan.

Finding the right information on buying a new home online can be tricky since there are many misleading or biased sources. This guide was prepared to get you started on home buying and home loans for first-time buyers.

Who Qualifies as a First Time Homebuyer?

The US Department of Housing and Urban Development considers you a first-time homebuyer if you meet certain conditions. It'll be more convenient to enjoy competitive offers from home sellers and lenders if you qualify as a first-time buyer.

Not owning a home for three years qualifies you as a first-timer in the housing market since the market landscape changes every few years.

You and your spouse can qualify as first-time buyers, too, if you want to buy a new place together, even when one of you recently owned a home.

You are entitled to the title if you are a single parent looking for a new place and you've only owned a home in your previous marriage. The title also applies to a displaced homemaker who only owned a home with their spouse.

You may be considered a first-time home buyer if you only own a home that isn't permanently built in a permanent foundation as per the building codes.

7 Things to Consider Before Buying a Home for the First Time

Long-term goals play a significant role in buying a new home. You may be looking to enjoy the independence of homeownership or turn your rent into mortgage payments. Whichever your reasons, here are seven crucial factors to look into:

Your Financial Health

Do a thorough audit of your financial health before going through house listings or fantasizing about a new home. The audit outcomes will help you determine whether you have the finances needed for this purchase.

You should have an emergency fund worth three to six months of your total living expenses set aside. The fund will help cater for emergencies and unavoidable expenses throughout the home buying process.

Ensure your credit is above the minimum limit required by lenders if you're considering a first-time home buyer loan.


Choose a convenient location to buy a house to enjoy amenities and the cost of living of your preference. You may use a cost of living calculator to find a list of cities with living standards that you can afford.

Carefully look at the place's demographic data (including age, ethnicity, population, and gender) to know what to expect. You should also consider the quality of life, public transit scores, and walkability in the area.

If you enjoy a quiet life away from the noisy city, a suburban neighborhood or a rural setting would be ideal. You should also get a place close to educational centers if you have school-going children.

Type of Home

Your options when buying a home include multi-family buildings, co-operative houses, a condominium, a duplex, and a traditional single-family house.

Depending on your goals for owning a home, each option comes with its ups and downs. Weigh the pros and cons of each house type against your current state of living to meet these goals.

Choose a fixer-upper in any option to improve your chances of saving on the buying price.

However, be cautious about the money, sweat equity, and amount of time needed to turn the fixer-upper into the home of your dreams. To your surprise, you may incur more than what you budgeted for.

Home Features That Appeal to You

Write all features you would like in your dream home before hunting for one. Since the house will be one of the most significant investments in your life, you need one that fits your unique wants and needs.

Feature listing should include details like kitchen and bathroom layout and the home's square footage and neighborhood.

Go through the real estate sites operating in the area you want to live in to get a feel of the availability and pricing of houses with these features.

Loan Amount You Can Actually Afford

It may be tempting to consider a house loan offer that is way above what you can actually afford. You risk ending up with little or nothing once the lender deducts the loan amount from your income.

Consider the total costs for buying and moving into the house in your decision for an ideal loan amount. You should also factor in the property taxes on that area, home maintenance and improvement costs, closing expenses, and homeowners insurance.

Choosing an affordable loan amount will help you maintain a healthy financial life. With adequate wiggle-room in your budget, you improve your chances of winning a bid for your dream home.

Your Mortgage Limit

Get a clear idea of the mortgage amount lenders are likely to give you when buying a home for the first time. Factors like your monthly income, debt to income ratio, and how long you've had your current job matter in this case.

It will be difficult for a realtor to work with you if you fail to clarify the amount of money you can afford to put into a house.

Lenders must pre-approve you for a first-time home buyer loan before you place an offer on any property. Furthermore, sellers will only take you seriously if your offer comes with a mortgage pre-approval.

Professional Real Estate Help

You need a realtor's help when choosing a home that suits your unique needs and fits your price range. The real estate agent will bring a professional touch to the steps of buying a house, making it seamless.

After choosing a house of your choice, the agent will help you negotiate the price, make an offer, get a loan, and complete the necessary paperwork.

They will also shield you from any mishaps associated with the process to reduce the financial impact and help you actualize your homeownership goals.

What Kind of Loan Programs are Available to First-time Home Buyers?

As a first-time homebuyer, you have the freedom to choose from several loan types regarding their rates, accessibility, affordability, and terms.

They include conventional loans, Federal Housing Administration (FHA) loans, Department of Veteran Affairs (VA) home loans, and US Department of Agriculture (USDA) home loans.

Here's a brief breakdown of each loan type:

Conventional Loans (3% Down Payment)

When you think of getting a first-time homebuyer loan, there are great chances that it is a conventional loan. A conventional loan will work well if you have a good credit score and are ready to part with at least a 10 percent down payment.

Consider three conforming mortgages if you're looking for a conventional loan with a down payment of as little as 3 percent. They include the Conventional 97 home loan, Freddie Mac's HomePossible loan, and Fannie Mae's HomeReady loan.

HomePossible and HomeReady mortgages boast low down payments (beginning at 3 percent) and flexible pre-qualifications for low-income buyers. On the other hand, though Conventional 97 mortgages don't offer discounts, they're ideal for first-time home buyers with excellent credit.

USDA Loans (0% Down Payment)

You can apply for a USDA loan if your dream house is in a low-density suburb or rural area and you don't want to make a down payment.

USDA loans blast cheaper mortgage insurance and lower mortgage rates. They are ideal for low and moderate-income earners looking to buy a house.

VA loans (0% Down Payment)

If you are an active member of the US defense forces or a veteran, consider a VA loan due to its flexible loan terms. You enjoy access to low mortgage rates, simplified pre-approval standards, and 100 percent financing with this funding.

VA loans continually beat other loan types over the years regarding mortgage rates. Compared to conventional loan rates, the rates are as little as 0.40 percent (40 basis points). Once eligible, the mortgages are also easier to afford.

FHA Loans (3.5% Down Payment)

Consider an FHA loan if you have credit issues or can only make a small down payment on your first house. With this type of loan, you can quickly get a mortgage approved despite your below-average credit score.

FHA loans work best with first-timers in the housing market with a credit score of 500 and 10 percent down payment and 580 with a 3.5 percent down payment.

Though their rates are significantly lower than conventional loans and require mortgage insurance premiums, their total costs are sometimes higher.

You can only use them on a property that'll be your primary residence rather than an investment or vacation home.

Key Terms to Understand Before Taking a Home Loan

Lenders expect you to be familiar with the terms used in the home loans market to get the most out of their services.

Having a basic grasp of terms like down payment, credit score, home buyer grants, and interest rates may also help you get a competitive loan offer.

Here's what you need to know about each one of them:

Down Payment

A down payment is simply the money a lender requires you to put down before approving you for a first-time home buyer loan.

The amount varies with the type of loan you're seeking. Either way, down payments, are flexible across all loan types and depend on the home's asking price, your current savings, and your monthly income.

A smaller down payment allows you to build equity as soon as you buy a house and spare part of your savings account for future unexpected expenses. On the other hand, a more significant down payment boasts a lower monthly payment and lower interest rate.

Credit Score

A credit score is primarily based on your ability to pay back the debt you owe to creditors.

Most first-time homebuyer loan programs require a credit score of 620, while others like FHA loans require a 580 credit score. USDA loans require a score above 640, while VA and conventional loans require a score above 620.

Expect lenders to examine your credit report to determine whether you have a history of paying debts on time. If you have any, the credit report will also help them identify issues like foreclosure or bankruptcy.

Start reviewing your credit report early to flag any errors, solve them and raise the score to qualify for an excellent first-time home buyer loan.

First-time Home Buyer Grants

Also referred to as down payment assistance programs (DPA), first-time homebuyer grants come in handy when looking to pay a down payment or closing expenses.

You can either qualify for a grant that you don't have to pay back or a low-interest loan to cover the down payment and closing expenses under the DPA program.

The grants vary in availability and size based on your location. Check the US Department of Housing and Urban Development for a directory of these grants in each US state.

Interest Rates

Lenders will determine your interest rate when shopping for a home based on the loan type, credit score, down payment amount, and overall interest rate market. Find a low-interest rate for affordable monthly mortgage payments and lower interest paid to the lender.

Improve your finances to boost your chances of getting a lower interest rate. Raising your credit score and saving a sizable down payment will help too. You should also shop with more than one mortgage lender to find friendly rates on a home loan.

Understanding Mortgages

When you have to borrow some money to purchase your dream home, you'll do it with a particular type of loan known as a mortgage.

Unlike other loan types, mortgages boast low-interest rates (about 3-4 percent yearly), extended repayment periods, and fixed rates and payments.

The lender will also secure the mortgage by your home's value and take back the house if you fail to make payments as instructed.

Determining How Much Mortgage You Can Afford

After choosing a suitable mortgage loan type, you have to think about the monthly repayments and the kind of home you can afford.

Set aside a budget for the mortgage payments and work backward to determine the maximum amount you can put on your dream home.

Calculating the Monthly Mortgage Payment

Expect your monthly mortgage payment to comprise four parts: principal, interest, insurance, and taxes. The principal and interest take up most of your mortgage payments since they include payments toward your loan balance and the paid interest.

Your homeowner's insurance will cost 0.25 percent to 0.50 percent of your annual home value. On the other hand, taxes form 1 percent to 2 percent of the annual value of your home.

Find the Mortgage Rate and Price Range

Your mortgage rates will determine whether your dream home falls under your budget. Note that these rates fluctuate weekly or monthly depending on the market demands. Expect them to change by 0.50 percent (50 basis points) or more.

Be on the lookout for the trending mortgage rates while house shopping to get the best deal. Avoid basing your home search on a specific price range since its affordability may change when the mortgage rates increase.

You may stretch your finances to a point where you can't afford basic life necessities if you fail to factor the rates in your budget.

Do You Need Private Mortgage Insurance (PMI)?

Getting private mortgage insurance would be a good idea if you want to buy a home for the first time without making a down payment of 20 percent. A conforming mortgage lender will also require you to have a PMI if you're making a 20 percent down payment.

With a PMI, you'll pay premiums to prevent your lender from taking back the house or avoid defaulting on the loan. The PMI policy will give the lender a chance to recover their lost money if you default on your mortgage.

Understand the terms of the private mortgage insurance policy before signing up to cushion yourself against unexpected expenses. Consult with your real estate agent about whether the policy will fit your current situation.

Happy young couple getting keys of their new home

Choosing the Right Mortgage for You

As a first-time homebuyer, expect different loan offers from lenders. To get a mortgage with favorable terms, you need to get your credit score in good shape and understand the lending landscape.

Here are five tips to get you started in the loan process:

Raise Your Credit Score

Mortgage companies will require you to meet a certain income and credit criteria to be assured that you can afford the loan.

With an excellent credit score, it's easier for you to negotiate better mortgage rates with lenders. Having a poor credit score will qualify you as a risky borrower and in turn get you higher interest rates.

Ensure that your credit reports are free of errors and accurate as you plan to raise your credit score. Credit bureaus like TransUnion, Experian, and Equifax can give you a free copy of the report every year.

Paying off your high-interest loans and lowering your existing debts can help boost your credit score. These approaches will help you free up more cash and save more for your down payment.

Know the Key Players in the Lending Landscape

The lending landscape is dominated by certain key players who offer competitive rates on loan rates. Examples of the common types of mortgage lenders include credit unions, mortgage bankers, correspondent lenders and mutual saving banks.

Understanding their loan terms and processes will help you navigate this market.

Credit unions operate as member-owned financial institutions that offer appealing mortgage interests to eligible shareholders. With the easing of membership restrictions in most credit unions, joining one is easy.

You may also consider mortgage bankers since they package loans aligned to the principles of a specific financial institution.

Correspondent lenders rely on other lenders to give you a loan, while savings and loans institutions are community-oriented financial institutions that allow members to save and take out loans.

Only choose a lender that is registered to the state you intend to buy a house. The Nationwide Multistate Licensing System Registry will give you a list of accredited state-based lenders to consider.

Searching the Better Business Bureau will help you find unbiased information and reviews on the mortgage lenders.

Get Pre-approved

Get a mortgage pre-approval letter that you can use when bidding for your dream home. With the letter, the seller will consider you as a serious buyer and allow you to bid on their property. Pre-approval letters also act as evidence that a lender has evaluated your finances.

While you may want to get the letter in the process of making an offer on a house, it will be too late. By then, lenders won't have the relevant information needed to process a home loan for you, making it difficult to secure finances for the house.

Most lenders will ask you for your Social Security numbers and bank, savings, investment, and checking account information. You also need to state your outstanding debt obligations and submit tax returns and salary and employer information.

You have to quote the amount of down payment you can make and the source of the payment. Once you're pre-approved by several lenders, you can use their loan estimate forms to determine which one offers flexible terms and rates.

Compare Different Mortgage Rates

A simple online search will give you a list of mortgage rates offered by different lenders. However, most rate quotes given online-only serve as estimates. For an accurate rate, submit your credit report and apply for a loan from a lender of your choice.

With several quotes at hand, compare the rates and choose one you can afford. A mortgage comparison tool will allow you to key in the rates and the amount you can afford as monthly payments. It will help you pick a home loan you can comfortably repay.

Talk to Lenders and Review their Terms

Ask the mortgage lender about their preferred mode of communication (email, phone calls, in-person, or texts) before agreeing to their terms. You should also find out more about their response times to determine whether they can help you promptly at a time of need.

The lender must be willing to disclose information about their turnaround times on appraisal, pre-approval, and closing.

Find out from them if you will be liable for any fees during closing or whether they'll roll the fees into the loan. Inquire about the down payment requirements and any buying discount points offered to clients.

The next step is to thoroughly read the loan documents to learn about the exact loan terms. These documents should state the party responsible for closing costs and whether the house will need an inspection contingency.

The Home Buying Process

The steps to buying a house can be tiresome and time-consuming, especially when approached with multiple offers and counteroffers. With adequate preparation, it can be hassle-free and can guarantee favorable outcomes.

Here are some of the things to expect:

Start Shopping for a Home

Take full advantage of all options for finding houses, including online listings, neighborhood listings, and the help of a real estate agent. Your business contacts, friends, and family members can also point you toward a good house that's on sale.

Have an agent accompany you to the property if you are serious about buying it. The agent will help you decide whether the offer is worth considering or not based on the housing market demands.

If you're operating on a budget, consider houses that are yet to meet their full potential. Most of these homes will require a few renovations but are worth the cost. The goal here is to find a property you can add significant value to improve your home equity.

Secure Finances After Reviewing Your Financing Options

Most homebuyer programs for first timers allow you to pay as low as 3 to 5 percent as down payment. Others don't even require you to make a down payment provided you meet their eligibility requirements. Explore different financing options to find one that offers convenient rates.

Your financing options may include VA home loans, USDA home loans, and conventional loans. Whichever your source, be sure to read the fine print to determine whether you can afford the monthly payments. Watch out for the hidden costs of each first-time home buyer loan you consider taking.

You may consider withdrawing part of your IRA savings to fund the house purchase without incurring a penalty for early withdrawal. However, if you fail to pay the money in 120 days and you're below the age of 59½, you'll pay a 10 percent penalty.

Pre-approval and Choosing Lenders

Shopping around for a home loan will get you favorable rates. Each lender you approach will verify your financial information before pre-approving you for a loan. Note that even with a pre-approval letter, it's possible for you not to get the loan if you tamper with your credit score.

With several pre-approvals, it's easier to shift to another lender if one freezes their loan program. The second lender will give you an alternative to securing a first-time home buyer loan and closing the sale.

Submit an Offer

Ask your real estate agent about the amount of money you offer when buying the house. Expect them to present the chosen offer to the agent representing the seller. If your offer is appealing enough, the seller may accept it.

You will have to go back and forth with the process until both of you reach a deal or decide to part ways if the seller rejects your offer.

Once you reach a final agreement, make a deposit and the transaction will go through an escrow. Your budget should factor in any costs incurred in the sale before submitting the offer.

Schedule a Home Inspection

Hire a trained home inspector to check the physical state of the property you intend to buy, even if it looks flawless. The inspector will check whether the house's overall condition, quality, and safety are up to standards.

Your mortgage lender can refer you to the best home inspectors in the area you'd like to buy a house. You should also get competitive quotes from different home inspectors and choose a favorable one. Either way, find out whether you'll incur the inspection costs out of pocket or transfer them to the lender.

A thorough home inspection will save you money on unnecessary repairs and replacements. If the inspection report reveals defects and the seller failed to disclose them, you're entitled to a refund of your deposit. You can also agree with the seller on a discount if you cover the repair costs.

Close the Deal

The deal will be ready to close if the inspection report doesn't reveal any defects and the seller has accepted your offer. During closing, expect to sign several documents while hoping no mishaps come your way.

Schedule the property for an appraisal as the mortgage lender requires to protect their money. You should also do a thorough title search to ascertain that only the seller has a legal claim to the property.

Have a budget to cater for closing costs such as credit report charges, taxes, surveys, title insurance, and loan origination fees.

Depending on your mortgage terms, the lender may agree to cater to the closing costs and expect you to pay later. They may also settle the expenses without expecting a dime from you.

What's Next After Becoming a Homeowner?

After signing the required paperwork and paying the movers, you are now ready to take on the ownership of the property.

However, there are some steps you need to consider as you take on your new title. Here are four tips to note for a secure and fun life as a homeowner;

Take Good Care of Your Home

Since home ownership is a considerable investment, you need to set aside a budget for maintaining your new home.

Taking excellent care of the property will improve its sanitary conditions and resale value if you intend on selling it in the future. You also prevent unexpected breakdowns and repairs with regular maintenance.

Open an Emergency Fund for the House

Though owning a home will stop you from incurring rent every month, it won't prevent unexpected expenses.

The costs may include replacing a faulty appliance or repairing areas of the home damaged by a natural disaster. You need an emergency fund to finance these expenses as soon as they occur to keep your new home in great shape.

Signing up for a homeowners insurance policy is a good idea if you're looking to supplement the emergency fund. The insurance policy will help you recoup losses in case of any applicable structural damages to your property.

Never Sell Your House to Fund Retirement

Keep your retirement savings account afloat during your journey as a homeowner. Resist the urge to sell your property as a way of funding your retirement since you may end up homeless or with a considerable debt burden.

Once you pay off your mortgage, you can direct the money you spent on monthly loan payments to fund your medical expenses and living costs in retirement.

Don't be Distracted by the Housing Market

Housing prices change due to supply and demand forces every year.

The market estimate of your new home shouldn't compel you into selling it, whether it's high or not. You shouldn't let the prices frustrate you into thinking that you overspent on your house.

Final Thoughts

As discussed in this guide, buying a house requires a lot of due diligence, patience, and expert help, especially for first-time buyers. The process can become more challenging if you consider a home loan to finance your new home.

You'll have a competitive edge against other buyers bidding on the house if you arm yourself with the correct information.

Enter the housing market when you're fully aware of what to expect for a less stressful and less confusing experience.

Know exactly how much you can afford to put on a house and find the right program to finance the property. Good luck finding the home of your dreams, and be sure to share your experiences with others.

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