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First Time Homebuyer Guide

Owning a home is the desire and dream of most people. At some point, you've thought of what you'd like your dream home to be, where it would be located, and every fine detail.

However, there's no denying that buying a home is one of the most significant purchases most people make.

If you don't have all the money to buy a home in one go, you can opt for options like mortgage and home loans.

As a first-time homebuyer, there are numerous considerations to factor in when you decide to buy a home.

What are these factors, how do they affect your chances of buying your first home, and how can you navigate the homebuying process?

Read on to learn more about buying your first home and all the first-time homebuyer requirements.

Who is a first-time homebuyer?

You'll need to be qualified as a first-time buyer to start the process. This term is used to encompass a group of approved people for various types of mortgage loans.

The term first-time homebuyer defines people housed in the following categories;

  • Someone who hasn't owned a principal residence for more than three years.

  • A single person who's only previously owned a house with a spouse.

  • Someone who's only owned a residence without a permanently fixed foundation.

  • A person who's only owned property that doesn't comply with relevant building codes.

If you qualify as a first-time homeowner under any of the above mentioned categories, the next step is proving your ability to repay the mortgage.

Generally, you'll need proof of income for at least two years, a down payment of at least 3.5%, and a 620-credit score or higher.

However, certain special programs allow you to buy a home even with low income, no down payment, and a credit score of at least 500.

Types of loans available to first-time buyers

Identifying the right type of loan available to you can save you a lot of money, improve your payment plan, and increase the odds of landing a better house.

The most common types of loans available for novel buyers include;

Conventional Loans

Conventional loans are fixed-rate mortgages that aren't guaranteed or insured by the federal government. These loans are the most challenging to qualify for because they contain strict requirements.

Some of the general requirements of a conventional loan include a high credit score, bigger down payment, lower debt-to-income ratios, and private mortgage insurance (PMI) potential.

On the plus side, if you can qualify for conventional loans, you should seize the opportunity as these loans are more affordable than loans guaranteed by the federal government.

Conventional loans can be further categorized into two groups; conforming and non-conforming loans.

Conforming loans comply with guidelines like loan limits set by the government-sponsored enterprises (GSEs), Freddie Mac, and Fannie Mae.

These and other lenders often buy and package these loans before selling them on the secondary market as securities.

However, any loan sold to the secondary market must satisfy specific guidelines to be classified as conforming loans. In 2022, the maximum conforming loan limit for conventional mortgages is $647,200 although the amount can be higher for various designated high-cost areas.

Loans made above the amount mentioned above are called jumbo loans and usually have a higher interest rate. Since these loans deal with more money, they are relatively riskier and therefore less attractive to the secondary market.

On the other hand, non-conforming loans have a different set of guidelines. These are often set by the lending institution underwriting the loan, which is also the portfolio lender.

Because of the diverged policies and governing regulations, these loans cannot be sold on the secondary market.

Federal Housing Administration (FHA) Loans

The FHA is part of the United States Department of Housing & Urban Development (HUD) and is mandated to provide various mortgage loan programs for citizens. Compared to conventional loans, FHA loans are easier to qualify for and require lesser down payments.

Additionally, these loans are less stringent when looking at your credit requirements. And since you can make a down payment of as low as 3.5 percent, an FHA loan is one of the best mortgage ideas for first-time homebuyers.

However, under FHA loans, you'll be required to pay a mortgage insurance premium, which is usually rolled into your mortgage payment.

Mortgage insurance protects the titleholder or mortgage lender against defaulting buyers, like when the borrower passes away or cannot meet the mortgage's contractual obligations.

United States Department of Veteran Affairs (VA) Loans

The U.S Department of Veterans Affairs guarantees loans for veterans. However, Veteran Affairs (VA) doesn't make the mortgage loans and instead uses qualified third-party lenders.

These terms aid veterans to acquire home with more favorable terms, including not being required to make a down payment.

These loans are easier to qualify for than conventional loans in most cases. The lenders usually limit the maximum VA loan to the corresponding limiting requirements in conventional mortgage loans.

Prior to applying for a VA loan, you'll require an eligibility certificate from the VA. Once the certificate of eligibility is granted, you can apply for the loan.

Additionally, local and state governments and agencies have various sponsor programs geared toward increasing investment or homeownership in specific areas.

Equity and Income Requirements

Mortgage lenders typically use two methods to determine your loan pricing. Both these methods are based on your creditworthiness as a borrower.

Aside from checking your FICO score on the three main credit bureaus, the mortgage lender will also calculate your debt-service coverage ratio (DSCR) and loan-to-value ratio (LTV).

This information is used to determine how much you qualify for in the loan and the subsequent interest rate.

The loan-to-value ratio (LTV) is the implied or actual equity available in the collateral borrowed against. This ratio is calculated by dividing the potential loaned amount against the home's purchase price.

Typically, lenders assume you are less likely to default on a loan if you put up a sizeable down payment.

By including various forms of qualified income sources during the mortgage negotiation process, you can significantly improve your chances of qualifying for the loan.

In many cases, a side hustle, extra part-time job, or other income source is the determinant for being qualified and getting a favorable interest rate.

Private Mortgage Insurance (PMI)

Your LTV ratio is also used to determine whether you'll require the abovementioned PMI. By transferring the loan risk to mortgage insurers, the lenders can shield themselves from defaulting borrowers.

Generally, most lenders require PMI for loans with LTV scores higher than 80%. This means any loan where you own 20% or less equity in the home purchased.

Mortgage insurance premiums are usually collected every month, alongside tax and property insurance escrows. Fortunately, the PMI is automatically eliminated once the LTV score is less than or equal to 78 percent.

Moreover, you can cancel the PMI when the house value appreciates more than 20% home equity and a preset duration passes.

It is noteworthy to mention that some mortgage lenders assess the mortgage insurance as a whole and capitalize it into the loaned amount. FHAs are perhaps the most notable types of loans to follow this method.

What Are the Available Specialty Programs for First-time Homebuyers?

In addition to the traditional funding sources, there are various other special programs targeted towards novel homebuyers. These include;

Ready Buyer Programs

This program is offered by the Federal National Mortgage Association (Fannie Mae). The HomePath Ready Buyer program targets first-time buyers and provides up to 3% assistance towards the closing costs on a foreclosed property purchase.

However, the property needs to be owned by Fannie Mae, and you need to complete a home buyer education course to be eligible to make an offer.

Individual Retirement Accounts (IRAs)

First-time homebuyers can withdraw up to $10,000 from their traditional IRA accounts without incurring the 10 % early withdrawal penalty. This limit applies to an individual, so couples can make withdrawals up to twice the amount.

This exception applies if the Roth IRA account has been active for at least five years. However, it is noteworthy to mention that the amount withdrawn is subject to income tax.

Down Payment Assistance programs

Most states have a down payment assistance program for first-time homeowners.

The eligibility to these programs varies from state to state, although most are tailored towards public servants and low-income individuals.

The HUD normally maintains a list of these programs for different states.

Frequently Asked Questions

What Credit Score Do You Need When Buying a House?

As formerly mentioned, conventional mortgages are the strictest when looking at your credit score. Typically, you'll need a credit score of at least 620 to access the loan.

FHA loans are more lenient and can accept a credit score of at least 500, although you'll have to put up a 10% down payment.

Alternatively, you can put up a 3.5% down payment if you have a credit score of 580 or higher.

What is the Average Interest Rate for First-time Homebuyers?

Numerous factors affect the interest rate charged by mortgage lenders. These factors include your credit score, type of loan, down payment percentage, and market conditions.

Currently, there is no available data supporting claims of a difference between new and old homebuyers solely based on similar circumstances and conditions.

Are There Any State Tax Credits for First-time Homebuyers?

In 2010, the tax credit for novel homebuyers was eliminated at the federal level. However, some states still maintain tax credits for new homebuyers.

Moreover, some counties and municipalities offer reduced property taxes for first-time homebuyers. Consult a tax professional to identify any tax credits in your locality.


In closing, it's important to recognize that buying a home is a key achievement at any stage. However, there are several challenges housed in the process, especially for first-time buyers. Before choosing a loan option, go over all the factors to ensure you're making the right choice.

For example, putting up a larger down payment can help lower your LTV ratio, thereby increasing your loan options and bargaining power.

And while a professional mortgage broker or banker can help you navigate the process, learning what each step entails and what options you have will help you make the best choice.

With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.

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