How to get a first-time home buyer’s loan

Purchasing your first home is simultaneously thrilling but intimidating! First-time home buyer loans have so many intricate steps and industry-specific terminology that many would-be buyers find themselves questioning if they are even ready. But remember: every successful homeowner was once a first-time home buyer. Let us help guide the way through this multi-step process so you know precisely how to get a first-time home buyer loan with confidence!

Before you start touring houses and falling in love with whatever cute fixer-upper is for sale, it is essential to be brutally honest with yourself about your financial standing. First-time home buyer assistance programs, such as the how much house can I afford calculator, can give you a decent idea of what you should be shopping for based on your yearly earnings, bills, debts, and savings. 

A mortgage lender will look at two critical financial figures when reviewing your loan application:

• Credit Score: Credit score requirements tend to vary between first-time home buyer programs. Your credit score needs to be at least 620 for conventional home loans, for instance, while FHA loans have a comparatively low 500 (or 580) minimum for first-time home buyers.
• DTI Ratios: You also need to meetDTI requirements to have a reasonable amount of income left after paying off debts, including your future home loan payment. Your debt-to-income ratio (DTI) should be ideally below 43%, which means your monthly bills should not be higher than your gross monthly income. Pay off credit cards and avoid taking out new car loans ahead of your first-time home buyer purchase to have a lower DTI than your first-time home buyer loan application.

As a first-time home buyer, you have several loan options that make the seemingly expensive house down payment and home purchase much more affordable. For one, you need to decide between an FHA vs conventional loan or another government-sponsored program better suited to your financial needs.

For instance, VA loans require $0 down payment and no mortgage insurance for eligible military service members, while USDA loans have fantastic 0% down options for qualifying rural and suburban home buyers. Meanwhile, conventional loans have slightly stricter qualifying criteria but are incredibly rewarding for first-time buyers with good credit scores who want to put at least 3% down on their dream home. FHA loans are an excellent alternative for first-time home buyers with bad credit scores who want to make a 3.5% down payment on their home purchase.

Consider Mortgage Rates and Additional Costs

When you find a house you want to buy, it is now time to think about mortgage rates and additional first-time home buyer costs. For one, you need to decide between a fixed-rate vs adjustable-rate mortgage. While the latter allows you to make lower payments initially, a fixed-rate mortgage offers much-needed stability and predictability in your monthly payments. First-time home buyers should be particularly cautious in the context of adjustable-rate mortgages since many are prone to taking on too much risk with their payments.

You also need to set aside funds for first-time home buyer closing costs. Having a clear understanding of the typical closing costs for first-time home buyers in advance can help you avoid any unpleasant surprises on your closing day. 

First-time home buyer closing costs typically range between 2% and 5% of your loan amount and include various expenses, among them:

• Title search and municipal tax lien checks.
• Appraisal fees.
• Lender origination fees.

Additionally, if you put less than 20% down on your property, you will need to pay mortgage insurance. This insurance is either private mortgage insurance (PMI) for conventional loans or mortgage insurance premium (MIP) for FHA loans with low down payments, and it essentially acts as a safety net for your lender in case of default. Your monthly home loan payment will go up by however much PMI/MIP applies to your first-time home buyer loan, so it is critical to keep those costs in mind.

Take Advantage of First-Time Home Buyer Assistance Programs

Many states have down payment assistance programs for first-time buyers that can help bridge the funding gap for your house down payment and closing costs. You can get substantial financial support by taking advantage of local down payment assistance programs, first-time home buyer grants, and tax credits. You might also want to look into first-time home buyer closing cost assistance programs to help you offset those costs.

But to legally obtain any of these financial aids, you need to apply for a first-time homebuyer grant. There are typically specific requirements you need to fulfill, such as completing a state-certified home buyer education course, working with an approved local loan originator, and adhering to first-time home buyer income limits, before receiving any government assistance.

Navigating the Mortgage Approval Process

The last step in your first-time home buyer journey is getting pre-approved for a mortgage. A mortgage pre-approval gives you confidence that a reputable lender will fund your home purchase. Even better, it reassures the seller that you are a legitimate prospective buyer. To get pre-approved for a loan, you need to have certain documents in order for the mortgage lender.

For standard mortgage applications, you are generally expected to provide the following:

• W-2 forms and federal tax returns for the past two years.
• Recent pay stubs for the past 30 days showing your gross income per paycheck.
• Bank account statements reflecting your checking, savings, and retirement account balances for the past two months.
• A valid government-issued ID and a social security number.

Having all the necessary documents ready and organized expedites the manual underwriting process significantly, helping you close on your home purchase sooner rather than later.

First-time home buyer loans should not be as stressful as they sometimes appear at first glance. By setting a realistic budget for your home purchase, you can avoid unwise debt commitments while giving yourself enough room to breathe. You should also compare loan program alternatives such as the FHA, VA, and USDA Home Loans and choose the most suitable first-time home buyer mortgage based on your financial situation. Finally, make sure you take full advantage of all the first-time home buyer assistance programs your state has to offer to make your dream of homeownership come true. So, prepare your mortgage application documents, get pre-approved, and take those first steps toward your brand-new home purchase today!

Reach out to MyCity Mortgage today and let’s discuss your home loan options today!