First-Time Homebuyer Qualifications: What to Know

Who Qualifies as a First-Time Homebuyer?

First-time homebuyer qualifications depend largely on the program you're looking into and whether it's run by your city, state or the federal government. But in most cases, you qualify as a first-time homebuyer if you haven't owned a home in the past three years.

According to HUD, you may also qualify if you are a single parent or a homemaker who was only a homeowner alongside a former spouse. You could also be a first-time homebuyer under HUD's rules if you previously owned a home that wasn't on a permanent foundation—such as a trailer—or your home did not meet building codes and would be too expensive to fix.

Requirements for First-Time Homebuyers

If you meet the definition of a first-time homebuyer, you can search for a home and apply for a mortgage with the help of programs designed with you in mind. Here are the additional requirements you'll likely need to meet:

Credit Score

Credit score requirements vary from program to program. Some, like Tennessee's Great Choice Loan Program, have a minimum credit score of 640, which is in line with the requirements for traditional conventional loans.

Other programs that are tailored to first-time homebuyers come with more lenient credit requirements. For example, Federal Housing Administration (FHA) loans require a minimum credit score of just 500 if you put at least 10% down. You can put just 3.5% down if your credit score is 580 or above. These government-backed loans are specifically geared toward first-time homebuyers and those with poor credit.

Debt-to-Income Ratio (DTI)

Mortgage programs come with a maximum debt-to-income ratio requirement. DTI shows the proportion of your monthly income that you put toward debt payments. For FHA loans, for example, you can have a DTI of up to 50% if your credit score is above 580 and you have sufficient cash reserves.

Learn more: How to Calculate Your Debt-to-Income Ratio

Down Payment

Since first-time homebuyers don't have proceeds from a previous home sale, and likely have had less time to save for a down payment, you may find lower down payment requirements within first-time homebuyer programs.

Many cities and states also offer down payment assistance programs to first-time homebuyers, which help you meet a lender's minimum down payment requirements. New York City's HomeFirst program, for example, provides up to $100,000 in down payment or closing cost assistance to eligible first-time homebuyers.

Steady Income and Employment

You'll likely need to show that you earn a regular income that can support your mortgage payment. Your job could also qualify you for specific homebuyer programs, like HUD's Good Neighbor Next Door Sales Program for police officers, firefighters and teachers, which charges eligible buyers 50% less for certain homes. Many first-time homebuyer programs are geared toward low- or moderate-income borrowers, so your income may also need to fall below a certain maximum amount to qualify.

Property Requirements

Often, the home you buy must be your primary residence, meaning it's not a vacation home or investment property, and programs might require you to live there for a certain number of years. Some programs limit eligible homes to single-family units. The home may also need to undergo an inspection or appraisal.

Homebuyer Education Course

First-time homebuyer programs often require completing a homebuyer education course. These typically provide a step-by-step overview of the mortgage process to help set up new homeowners for success. Fannie Mae's HomeReady loan, for example, comes with the requirement that at least one borrower take a homebuying course if all co-borrowers are first-time homebuyers.

First-Time Homebuyer Benefits

There are several benefits to being a first-time homebuyer, including:

• Affordable down payments: You could qualify for loans with down payments of just 3% or 3.5% (more on loan types below). Or you could get down payment assistance that limits the amount of your own funds you must contribute.
• Closing cost assistance: Typically, as part of down payment assistance programs, state first-time homebuyer initiatives also help cover closing costs, which can total 2% to 5% of the home's purchase price. Down payment and closing cost assistance often come in the form of a 0% annual percentage rate (APR) secondary loan provided in combination with a state-sponsored home loan.
• Educational resources: The homeowner education courses required by many first-time homebuyer programs can provide valuable guidance on managing and repaying your loan.
• Tax benefits: There is a range of tax breaks for homeowners, including tax deductions for mortgage interest and property taxes paid.

First-Time Homebuyer Loans

Below are loan types available for first-time homebuyers:

• Fannie Mae 97 LTV Standard loans: These conventional loans allow first-time homebuyers to make a down payment of just 3%, and require a minimum credit score of 620.
• Fannie Mae HomeReady loans: Another type of conventional loan, the HomeReady loan is for homebuyers who earn up to 80% of their area's median income. It also allows for a down payment of just 3%. First-time homebuyers with the lowest incomes can receive a $2,500 credit to put toward the down payment or closing costs.
• Freddie Mac Home Possible loans: These are conventional loans offering a 3% down payment option for first-time homebuyers, and also allow non-occupants to be co-borrowers on the loan. Borrowers' income must be less than 80% of the area median income to qualify.
• FHA loans: First-time homebuyers can qualify for an FHA loan with a credit score of at least 500 and 10% down, or a credit score of at least 580 with 3.5% down. There are limits to the amount you can borrow, based on where you live.
• VA loans: Former and active military service members who are first-time homebuyers can qualify for a Veterans Affairs (VA) home loan with no loan limits and no down payment.
• USDA loans: These loans, backed by the U.S. Department of Agriculture (USDA), are for borrowers living in eligible rural areas whose incomes are up to 115% of the area median income. USDA loans do not require a down payment.

Learn more: First-Time Homebuyer Loans, Programs and Grants

How to Get a Mortgage as a First-Time Homebuyer

Here are the general steps you'll take to get a mortgage as a first-time homebuyer:

1. Get Preapproved

Your first step will be to provide documentation to a lender and undergo a credit check in order to get preapproved for a mortgage. Having a lender's preapproval letter in hand when you make an offer on a home will make you a more competitive prospective buyer.

Learn more: How Long Does a Mortgage Preapproval Letter Last?

2. Find a Real Estate Agent

Next, work with a local real estate agent to find homes in your target area that fit your budget. You can find an agent by searching the National Association of Realtors' online database.

3. Choose a Home

When looking for your ideal home, consider factors beyond price or size, such as its location, nearby schools and amenities and potential red flags like pests, water damage and problems with the foundation.

4. Make an Offer

Once you've picked the home you want to buy, you'll decide how much to offer—which can be tricky if you're in a competitive or low-inventory market with others making all-cash offers. If you want to offer more than the asking price, work with your real estate agent to ensure you don't bid more than the house is likely worth.

5. Apply for a Mortgage

After you've agreed on the home's price with the seller, your mortgage lender will do a final review of your personal and financial information, including anything that's changed since preapproval. You'll then wait to receive final approval for your loan.

6. Get an Appraisal and Inspection

The lender could take up to two months to underwrite your loan to determine whether you qualify and what interest rate you'll receive. During this time, the lender will have your home appraised, and you can shop for homeowners insurance and order a home inspection for the property.

7. Close on the Home

If your loan is approved, you'll be considered clear to close and can schedule closing. That's when you'll pay closing costs, hand over the down payment and sign documents that officially transfer the home to you.

Learn more: The Complete Guide on How to Get a Mortgage

Frequently Asked Questions

The Bottom Line

There are a lot of reasons to celebrate your status as a first-time homebuyer, including access to a number of unique programs that make home ownership more affordable. But no matter what programs you qualify for, the most important step is to make sure you choose a house you can afford. That way, you can pursue other goals that matter to you while you enjoy being a homeowner at last.