When you're ready to start shopping for your first home, sit down with your lender of choice to get prequalified for a home loan. By getting prequalified, you're allowing the lender to take an unofficial look at your earnings and credit profile, which gives you an estimate of how much home you can afford. When you're ready to put a contract on a house, you get a pre-approved mortgage, a process that more closely scrutinizes your financial profile.
Choose a Lender
You can start your search for a first-time home loan lender with your bank, but it's best to compare the interest rates and loan terms of several lenders before deciding which one to go with. You can compare the interest rates and loan terms of lenders locally and online.
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First-Time Homebuyer Loan Programs
Typically, first-time homebuyers fit a certain profile -- a short time on the job, moderate income, less-than-perfect credit, lack of major assets and lack of a 20 percent down payment. To allow the typical first-timer to buy a home in spite of these issues, the federal government -- through agencies like the Federal Housing Administration, the Department of Veteran's Affairs and the U.S. Department of Agriculture -- insures loans made to first-timers, making it easier for the lender to take on the risk such homebuyers sometimes represent. Talk to your lender about which type of federally insured, first-time loan you qualify for.
If you're a first-time homebuyer with a good job and excellent credit, and you've saved up a 20 percent down payment, there's nothing stopping you from applying for a conventional loan, which offers you the lowest interest rates and best repayment terms.
What Lenders Consider
When you sit down with a loan officer, he'll determine if you qualify and for how much based on the following components of your financial profile:
Your credit score
Lenders prefer first-time homebuyers to have credit scores around 620 to get better interest rates and qualify for the low down payment. For FHA-insured loans, for example, a few lenders may consider first-timers with scores as low as 580, the drawback being that you'd have to have a 10 percent down payment -- which qualifies you for loan that covers 90 percent of the purchase price -- rather than the normal 3.5 percent down payment -- which covers 96.5 percent of the purchase price.
Lenders consider how much money you make and how that compares to the amount of it you spend. Common first-time homebuyer debt-to-income ratios are as follows:
- FHA -- wants no more than 43 percent of your total income dedicated to all of your debts, including your mortgage.
- Department of Veterans Affairs and the USDA -- want no more than 41 percent of your total income to pay for all debts, including your mortgage.
Your debt-to-income ratio pinpoints the price range in which you can shop for homes.
Lenders require most home loan applicants, including first-timers, to pay some money upfront to cover items that include, at minimum:
- Your full credit report
- An appraisal fee
Some lenders charge application fees at the time of loan application, while others allow you to include such fees as part of your closing costs. Upfront fees vary among lenders. Review all lender fees closely with your loan officer, real estate agent or attorney.
First-Time Homebuyer Help
If you're unable to come up with the down payment and closing costs, consider applying for assistance, sometimes dubbed first-time homebuyer help programs. Such programs are offered through state-sponsored housing corporations. These state agencies may also carry the term "affordable housing" as part of their name. You may qualify for interest-free or "delayed repayment" down payment loans, explains Polyana da Costa in an April 2014 Bankrate article. Ask your lender about first-time homebuyer help programs available in your state. You can sometimes find information about such programs posted on your state government's website.