What is a first-time homebuyer?
Logically, a first-time homebuyer might refer to someone who has never purchased a home before. But in some contexts, the definition is actually much broader than that.
Prospective homebuyers who can’t scrape together a substantial down payment may be eligible for assistance through first-time homebuyer grants and loan programs. To qualify for many of these programs, prospective buyers generally must not have owned a home for at least the previous three years.
How to qualify for a home
Qualifying for a home can be a challenge. Home prices have shot up since the housing crisis and are now at all-time highs. Meanwhile, wages continue to stagnate and consumer debt levels have surpassed $4 trillion – not including mortgage debt – increasing 22 percent over the past five years.
However, these general economic conditions may not apply to your personal financial situation. Before looking at housing options, take stock of your finances by answering these questions.
How much home can you afford?
First look at how much debt you have relative to your income, called the debt-to-income ratio. When determining how much of your gross income you should spend on a home, most financial advisers say it should be capped at 36 percent.
The ideal ratio for housing costs, including the mortgage payment, real estate taxes, homeowners insurance and homeowners association dues, should be 28 percent, while 36 percent should represent all your monthly debt, including housing. Some lenders even allow a DTI ratio up to 50 percent, however, the higher your DTI ratio, the more likely you are to pay a higher interest rate because you’re considered a riskier borrower. You don’t want to become house poor and stretch your monthly budget to its limit, so proceed with caution.
Do you need a down payment?
With a 20 percent down payment, you can avoid paying private mortgage insurance, which actually covers the lender (not you) should you default on the loan. But first-time homebuyers can get away with paying less than 5 percent with certain types of loans. USDA or VA loans require no down payment at all, while FHA loans require a minimum of 3.5 percent down. Conventional loans backed by Fannie Mae and Freddie Mac require as little as 3 percent down.
Is there a minimum credit score?
With a high credit score, you can get favorable loan terms that will save you gobs of money over the life of your mortgage loan. But you can still get a loan with a score as low as 500 (for FHA loans) or 620 (for conventional loans).
Step-by-step first-time homebuyer guide
Step 1: Assess your personal finances.
Step 2: Get mortgage quotes from three lenders
Step 3: Get preapproved for a mortgage
Step 4: Find a good real estate agent
Step 5: Shop for your home
Step 6: Make an offer
Step 7: Negotiate closing costs
Step 8: Hire a home inspector
Step 9: Get homeowners insurance and finalize move-in details
Step 10: Seal the deal at closing
Takeaway: You now have a new title: homeowner. Congratulations! 🏡