To be eligible for first-time home buyer programs, generally, you can't have owned or co-owned a home in the three years before you apply.
There aren't any specific borrower requirements that only apply to first-time buyers (unless a particular loan product has a separate credit or down payment requirement for first-timers). For the most part, first-time buyers are subject to the same general requirements that all mortgage applicants face.
Whether you're buying a home for the first time or you haven't bought a home for a long time, there's a lot to learn. Here are the general categories of information your mortgage lender will consider when you apply for a mortgage for your first home.
Credit
Before verifying any of your other qualifications, lenders will typically run a credit check. Currently, mortgage lenders use the FICO credit scoring model. In the near future, mortgage lenders are expected to also use the VantageScore model. You already have both kinds of scores, and they are provided by the major credit bureaus (Equifax, Experian, and TransUnion).
When you apply, expect the lender to pull your scores from all three bureaus and use the middle number. FHA loans require at least a 580 FICO® Score if you make a 3.5% down payment. If you can make a 10% down payment, you might qualify with a lower score. Conventional loans usually require at least a 620.
Down payment
Some mortgage loan programs don't require a down payment. They include:
- VA loan
- USDA loan
- Some doctor loans (mortgages for doctors who have high student loan debt and insufficient savings for a down payment)
- Some down payment assistance programs for low-income borrowers (grants and loans are available to cover the down payment)
- Special zero down mortgage programs offered by some credit unions to their members
Most other borrowers will need to make a down payment. FHA and conventional loans have low down payment options, and funds can usually come from a gift. You'll need to document what funds you have for your down payment and where they came from, as well as how you plan to pay for any closing costs.
Debt-to-income ratio
Lenders want to make sure you'll be able to afford your mortgage payments, so they'll look at your debt obligations as a percentage of your income. This metric is known as your debt-to-income ratio, or DTI ratio. Methods of calculating DTI and lending standards can vary, but a good rule of thumb is that your total monthly debt obligations (including your new housing payment) should be no more than 45% of your pre-tax income.
However, there are many exceptions, and borrowers have different costs of living to deal with, so if you feel you can comfortably afford to have a higher DTI ratio, don't be discouraged. In fact, you could qualify for a mortgage with a DTI as high as 57% in some cases.
Employment
Lenders want to know that not only can you afford your mortgage payments for now, but that you'll also be able to keep paying your mortgage year after year. Employment stability is one factor they look for. Most mortgage lenders want to see at least two years of steady employment in the same field (but not necessarily with the same employer). There are exceptions, however -- such as if you graduated from college less than two years ago.
Assets/reserves
Depending on the mortgage loan you select, as well as your other qualifications, your lender is likely to require that you have a certain amount of money set aside. This is called cash reserves, and the requirement could be anywhere from one month's to one year's worth of housing payments. You may be able to satisfy the cash reserves requirement by showing that you have money in savings or that you have assets like a retirement account or stocks.
Before you apply for a mortgage, it makes sense to ensure each of these are in good shape. For example, check your credit score. When you research lenders, ask them what credit score is needed for a lower rate. If your score is close, it could be worth it to raise your credit score before you apply. A rate that's even a fraction of one percent lower could save you a lot of money over the life of your loan.
Choosing the best lender for first-time home buyers
The first step in choosing the best mortgage lender for your first home purchase is to get a good understanding of how home loans work. Then you'll need to narrow down a short list of a few (say, three or four) lenders with products and resources that meet your needs and that have strong customer service.
Our best first-time mortgage lender list on this page is a good place to start, but it could also be a smart idea to check out your local and regional banks or credit unions so that you can compare mortgage rates. If you're looking for a digital application process, be sure to check out our list of the best online mortgage lenders.
Once you have a short list, apply for a mortgage with all of them to compare the specific loan terms and fees that you get offered. It won't hurt your credit score to do this, as all mortgage-based credit inquiries that take place within a typical shopping period are counted as just a single inquiry. You'll see a range of interest rates, fees, and APRs from different lenders, and you'd be surprised at how much this can save or cost you over the life of a 30-year mortgage loan.
It's a good idea to communicate your intentions after you apply. In other words, if you decide not to go ahead with a lender, let it know that.
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