How to Qualify for a Home Loan as a First Time Buyer

With interest rates rising, homes for sale inventory rising, and home prices in many markets falling, now is a good time to purchase your first home if you’ve been sitting on the sidelines during the ‘hot’ market. If you’re interested in taking advantage of the opportunity, here’s how to qualify for a home loan as a first time buyer.

What Qualifies You as a First Time Buyer?

To help first time homebuyers, lenders offer products with reduced restrictions in the following four general categories:

  • Down payment requirement: Lenders usually only lend you a portion of a property’s purchase price, which means you’ll usually need to bring some cash to the deal.
  • Creditworthiness: Mortgages are a massive, multi-year debt commitment. Lenders want to see that you can handle your credit accounts responsibly.
  • Income requirements: Lenders do want to know you can afford your monthly mortgage payment. They’ll examine your paychecks for the past couple of years or so.
  • Miscellaneous: Some loans have unique requirements that make them accessible only for their intended users, such as military members.

Meeting all of these requirements can be challenging, but lenders make many accommodations for first timers. After all, public policy in the United States has long encouraged homeownership. 

Here’s a quick overview of these types of requirements for some of the most popular loans for a first time home buyer.

Popular First-Time Home Buyer Loans

Minimum Down PaymentMinimum Credit ScoreMaximum Debt-to-IncomeMaximum IncomeMisc Requirements
FHA Loan3.5%58050%N/ACan only have one at a time
VA Home Loan0.0%58041%N/AMilitary only
USDA Home Loan0.0%64041%115% of area medianRural areas only
Conventional 97 Loan3.0%62043%N/AN/A
Fannie Mae HomeReady Loan3.0%62045%80% of area medianN/A
Freddie Mac Home Possible Loan3.0%66045%80% of area medianN/A

For more information on the credit requirements for a first time homebuyer loan, read this guide: What is a Good Credit Score to Buy a House?

Popular Loan Options Available to First Time Home Buyers

While you can often tell at a glance that some types of loan options are not going to be available to you, you’ll need a lot more information to figure out which one you should use.

To help you understand your choices, here’s a deeper dive into the most popular loan options available to first time home buyers looking to buy a primary residence.

FHA Loan

The Federal Housing Administration (FHA) is a federal agency whose primary job is to stimulate the housing industry. To fulfill that role, they insure loans for mortgage lenders, which prevents them from taking heavy losses if borrowers default.

The FHA needs to approve a mortgage lender before they can offer FHA loans. Once they do, they can offer a lot of benefits to first time homebuyers. That includes:

  • Looser credit requirements: Conventional loans usually require credit scores of 620, but you can get away with a score in the 500s with an FHA loan.
  • Smaller down payments: If you qualify for an FHA loan, you can put down as little as 3.5% with a credit score of 580. If your score is below that (down to 500), you may still qualify, but you’ll need to put down 10%.
  • Lower interest rates: Because the risk to the lender is lower with an FHA mortgage than a conventional loan, they often have lower interest rates. 

FHA loans aren’t perfect, though. If you take advantage of the lower down payment (10% or less), you’ll have to pay a mortgage insurance premium (MIP) upfront and over the entire life of the loan.

Even if you put more than the minimum 10% down, you’ll have to pay the upfront fee and the recurring fee for 11 years. The standard amounts are 1.75% of your loan balance upfront and .85% per year in monthly installments.

Borrowers have to refinance into a conventional loan to get out of paying MIP indefinitely, which they can only do once they reach 20% equity.

FHA loans also have lower borrowing limits than conventional loans. They vary significantly in different parts of the country, but you can look up the loan limit for your area using the Department of Housing’s website.

VA Home Loan

The Department of Veterans Affairs (VA) oversees a wide variety of benefit programs for military members and their families. The VA loan program is one of their tools for helping them become homeowners.

If you qualify for a VA loan, it’s probably going to be the best loan option available for you. VA loans come with exceptional perks, including:

  • No down payment or private mortgage insurance
  • Limited closing costs
  • Payment assistance program to help borrowers avoid default
  • Lower credit score requirements than a conventional mortgage

To qualify for a VA loan, you must meet the minimum active-duty service requirements. They range from 90 days to 24 months, depending on when and where you served. Alternatively, you may qualify as the surviving spouse of a veteran.

USDA Home Loan

The United States Department of Agriculture (USDA) is a federal government agency whose mission is to improve the quality of life in rural American areas. As part of that mission, they also guarantee USDA loans for approved lenders.

USDA loans help people with low to moderate incomes buy, maintain, and even improve homes in rural areas. If borrowers default, they’ll reimburse lenders for up to 90% of the mortgage balance, which lets lenders offer superior terms on these loans.

USDA loans have the following advantages:

  • No minimum down payment requirements
  • Reduced mortgage insurance rates (1% upfront and 0.35% annual)
  • Lower average interest rates than conventional mortgages

USDA loans have slightly less favorable terms than VA loans, but they’re accessible to a much higher percentage of the population. 97% of America falls into the USDA definition of rural, which is any area with a population of fewer than 35,000 people.

However, borrowers can’t have more than 115% of their area’s median household income. For example, if the median income in your town is $40,000, you can’t earn more than $46,000 per year.

Conventional 97 Loan

While governmentally insured loans like FHA loans, VA loans, and USDA loans have their advantages, they’re not the right loan type for everyone. If you have the credit score and debt-to-income (DTI) ratio to qualify for a conventional loan, it’s often the better choice.

You can put down as little as 3% on a conventional loan, and while you will pay private mortgage insurance (PMI), you won’t need to refinance to get rid of it. Once you reach 20% equity, you can just request that your lender cancel it.

Conventional loans also reward people for having great credit more than other loans. Governmentally insured loans tend to have set mortgage insurance rates, regardless of your credit score, but you can beat those with a conventional loan and a great score.

Those minor rate differences lead to significant savings over time. For example, say you took out a $300,000 mortgage loan. If it’s an FHA loan, you’d pay 1.75% upfront, which is $5,250. If your monthly MIP is .65%, that’d be another $162.50 a month.

With a conventional loan, you wouldn’t have to pay the upfront insurance. You could also have a lower monthly PMI. If it were .45%, that’d be just $112.50 a month. All in all, you’d save $5,250 upfront and $50 a month during the first year.

You’d need to know the interest rate differences before you could choose the right option, but you can see how this would add up quickly.

Fannie Mae HomeReady Loan

You’ve probably heard of Fannie Mae and Freddie Mac before. They’re government-sponsored entities responsible for providing liquidity to mortgage lenders, which means they purchase the mortgages that conform to their standards.

The Fannie Mae HomeReady Loan is a conventional loan. It allows up to 97% financing, meaning you can put down as little as 3% and still qualify. You’ll pay mortgage insurance, but it’s cancellable once you reach 20% equity.

HomeReady Loans have the same credit requirements as conventional 97 loans (620), but they’re for people with lower income levels. You have to earn less than 80% of your area’s median income to qualify, and their DTI ratio limit is 2% higher.

Freddie Mac Home Possible Loan

Finally, there is the Freddie Mac Home Possible Loan. These are virtually identical to Fannie Mae HomeReady Loans. They have the same low deposit requirement, mortgage insurance policy, DTI ratio requirement, and income limit.

The only significant difference between the two types of loans is that the Home Possible Loan requires borrowers to have a credit score of 660 rather than 620.

It’s no surprise that these have such similar eligibility requirements given that Fannie Mae and Freddie Mac are sibling institutions.

How Do I Find a First Time Homebuyer Program?

Most home buyer programs are state or locale-based. A quick online search for home buying assistance near you should be enough to point you in the direction of the organization that operates in your area.

These programs include some surprisingly powerful benefits, including:

  • Closing cost assistance
  • Down payment assistance
  • Homebuyer education classes
  • Lists of affordable homes for sale

For example, the California Housing Finance Agency (CHFA) offers deferred-payment junior loans that cover up to $15,000 of your down payment for an FHA, USDA, or conventional loan.

These services are more common across the country than you might think and can help you clear a lot of the hurdles to homeownership.

If you’re interested in a specific mortgage program like an FHA loan, the providers can often point you toward a participating lender or a helpful loan officer.


What Is the Minimum Income to Qualify for a Home Loan?

There are no minimum income requirements to qualify for a home loan. Your lender will take your income into account, but it doesn’t mean much in a vacuum. They’ll look at it in relation to your current debts and expenses, as well as your prospective property.

For example, a single person with a $50,000 salary and no debt could probably qualify for an 80% loan-to-value (LTV) mortgage on a $120,000 property.

However, someone with a $100,000 salary, $15,000 in credit card debt, and two kids in college would probably struggle to qualify for an 85% LTV mortgage on a $500,000 property.

How Much Do First Time Home Buyers Usually Get Approved For?

It’s difficult to say how much the typical first time home buyer will receive in a mortgage. Two people can both be first time home buyers and have vastly different incomes and property values depending on where they live.

That said, one way to answer the question is to check the value of the average FHA loan, which is typically a loan for first time homebuyers. In 2021, roughly 31% of FHA loans were for amounts between $250,000 and $399,000.

That was the most common range, with only 7% of FHA loans having balances higher than $399,000. The two second-most common ranges were $150,000 to $199,000 and $200,000 to $250,000, each of which included roughly 21% of FHA loans.

How Can I Improve My Credit Score to Get a Home Loan?

The average FICO score for consumers with a mortgage was 753 in 2020. Considering the maximum is 850, you’re going to need an excellent credit score to qualify for the best mortgage interest rates.

To get started, first get a free copy of your credit report and credit score. Figure out the weakest parts of your credit profile and make a plan to improve them.

Second, start applying to accessible accounts that build credit. If you have a bad credit score or a short credit history, you’ll need some that are available for riskier borrowers without costing too much in interest.

Ideally, you should open both types of credit: installment debt (like a student loan) and revolving credit (like a credit card).

One of the best options on the market is a credit builder loan like Credit Strong’s. You can improve your payment history with an affordable monthly payment and build savings simultaneously. We won’t even check your credit when you apply.

Depending on their past credit history, many Credit Strong users rapidly increase their credit scores in just 3 to 9 months. Within the first three months of opening the account, the average Credit Strong user increased their score by over 25 points. Find out how quickly you could reach your credit goals with a Credit Strong credit builder loan: How Long Does It Take to Build Credit?

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