FHA first-time homebuyer loans offer a low down payment, reduced interest, limited fees, and the possibility of deferring payments. These types of loans are offered at a federal level by the Federal Housing Administration and by most states. The FHA defines a first-time homebuyer as a person who has not owned a home for three years.
A first-time homebuyer, according to the U.S. Department of Housing and Urban Development (HUD), is someone who meets any of the following conditions
- An individual who has not owned a principal residence for three years. If you’ve owned a home but your spouse has not, then you can purchase a place together as first-time homebuyers.
- A single parent who has only owned a home with a former spouse while married.
- A displaced homemaker who has only owned a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local, or model building codes—and that cannot be brought into compliance for less than the cost of constructing a permanent structure.
WHO QUALIFIES AS A FIRST TIME HOME BUYER
According to HUD, (Department of Housing and Urban Development) anyone who has not purchased or owned a home in the past three years qualifies as a first-time homebuyer. HUD’s Criteria for first-time homebuyers: An individual or spouse who has had no ownership in a principal residence during the past 3 years.
- A single parent who has only owned with a former spouse while married.
- An individual who is a displaced homemaker and has only owned with a spouse.
- An individual who has only owned a manufactured home
FIRST TIME HOME BUYER REQUIREMENTS
Credit A minimum 580 credit score is required for a mortgage except FHA and VA loans which you can be approved with a 580 credit score. Generally, most mortgage loans require a credit score of 620 or higher. Lenders look at more than just your credit rating. Late payments and collection accounts could make it more difficult to get approved.
You can get a mortgage after a bankruptcy 24 months after it is dismissed, 12 months if you have extenuating circumstances. Late Payments – You should not have any more than one late payment on any of your accounts in the past 12 months Foreclosure – There is a 36 month waiting period after the dismissal of a foreclosure. Collections, Judgements, and Federal Debt – Lenders may verify that judgments and Federal debt have been paid or on a payment plan. Student Loans – 1% of your total student loan debt will be factored into your debt-to-income ratio.
Get a Copy of Your Credit Report You can get a free copy of your report at annualcreditreport.com. This is a Government-run site that allows consumers to get a free copy of their credit reports once per year. Check Your Report for Errors Go through each item on your report to make sure there are no errors. If you find anything inaccurate, contact the credit bureaus immediately to file a dispute.
DEBT TO INCOME
The maximum debt-to-income ratio you can have for a conventional mortgage is 43%. Government home loans allow for up to a 50% DTI ratio making them ideal for low-income buyers. Your debt-to-income ratio (DTI) is the amount of your income that goes towards your debt obligations. This includes credit card payments, car loans, and other loans and lines of credit. For example, if your pre-tax income is $5,000 and your debt payments, including your mortgage loan, comes to $2,000, your back-end ratio is 40%.
EMPLOYMENT REQUIREMENTS FOR FIRST TIME HOME BUYERS
You should have at least two years of stable employment with your current employer. If you have changed employers in the past two years but remained in the same industry, you will be fine. If you have bounced around from different employers in different industries, then you may run into issues. Self-employed borrowers will need to provide two years of tax returns. Lenders will use the average annual income for your loan applications. Income used for a home loan needs to meet the acceptable income standards for a mortgage. If you are self-employed or work on commission the average of your last two tax returns will be used. Qualifying Income Salary and hourly wages Alimony and child support Bonuses and commissions Part-time employment Disability benefits Retirement, government, annuity, and pension income Social security payments
FIRST TIME HOMEBUYER HOME LOAN REQUIREMENTS
By Mortgage type
- Credit Score Down Payment Income Limit Max DTI Ratio FHA Loan 580 3.5%
- USDA Loan 620 No Down Payment
- VA Loan 550 No Down Payment
- 203k Loan 640
- Conventional Loan 620 5% Down
- HomeReady / Home Possible Loan 620 3% Down
- Jumbo Loan 680 15% Down
FHA loans are perfect for first-time buyers because they require just a 580 credit score with 3.5% down. Buyers with a 500-579 credit score may qualify with 10% down. The maximum debt-to-income ratio is 43% to 50% and a mortgage insurance premium is required along with an upfront MIP fee of 1.75% of the loan amount. Minimum 580 credit score (500+ with 10% down) 3.5% down payment 50% maximum DTI
HOME POSSIBLE AND HOME READY LOANS Fannie Mae and Freddie Mac created loan programs for low-income first-time homebuyers. HomeReady and Home Possible loans require a 3% down payment with a 620 credit score. Your income cannot exceed 100% of the area median income (AMI) to be eligible. Minimum 620 credit score 3% down payment 50% maximum DTI Income cannot exceed 100% of AMI
VA LOANS A VA loan is a mortgage loan for veterans guaranteed by the Department of Veterans Affairs. They require no down payment or mortgage insurance, making them the cheapest type of mortgage available today. Minimum 550 credit score No down payment No mortgage insurance Maximum 50% DTI Section 203k Loans If you’re interested in buying a fixer-upper where you buy a home that needs repairs. An FHA 203k loan gives you a loan for both the purchase of the property and the cost of repairs and home improvements. Minimum 620 credit score 3.5% down payment 45% maximum DTI
USDA LOANS The U.S. Department of Agriculture created the USDA loan program to help low-income buyers in rural areas of the country become homeowners. If you’re in a USDA eligible location, then you may qualify with no downpayment and a low mortgage rate of just 0.35%. Minimum 640 credit score No down payment Maximum 50% DTI
CONVENTIONAL LOANS If you have at least a 20% down payment, you should consider a conventional loan since no PMI is required with 20% down saving you thousands of dollars per year. Minimum 620 credit score 5% down payment 43% maximum DTI FHA Energy Efficient Mortgage (EEM) The Energy Efficient Mortgage Program helps borrowers finance the purchase plus get additional funds to make energy-efficient improvements. The EEM program requires a 580 credit score with a 3.5% down payment. Minimum 580 credit score 3.5% down payment 45% maximum DTI Conventional 97 Loans
FANNIE MAE CREATED CONVENTIONAL 97% LOAN to compete with the low down payment FHA loans offer. With just a 3% down payment and a 680 credit score, you can qualify for the conventional 97 loan program. Minimum 680 credit score 3% down payment 43% maximum DTI.
A loan officer will check your credit and verify your income and assets with your W2’s, tax returns, bank statements, and paycheck statements. Most realtors will not even start showing your houses before you have a pre-approval letter in hand. Most sellers won’t accept offers that do not come with pre-approval letters. The process is quick and easy. Usually, you can be pre-approved in a matter of minutes. Get Pre-Approved Today Have Your Documents Ready Your lender will need many documents before you can close. Save time by organizing your loan documents and having them ready for your loan officer. Documents Needed for Pre-Approval Last two years of W2’s and tax returns 30 days worth of paystubs Three months of bank statements Profit and loss statements if self-employed Driver’s License Down Payment Requirements The amount of the down payment needed to buy a house will depend on the type of mortgage you get.
First-time homebuyers typically have less money in savings than repeat buyers, which is why low and no down payment home loans are so popular. Down payments need to be seasoned and documented for the lender. The down payment needs to be in your savings account for at least two months, and you will need to provide your bank statements to your loan officer.