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First-Time Home Buyer Guide & Resource Center

Where Should a First-Time Home Buyer Start?

Couple with keys to home | First time home buyers

Buying your first home can be an intimidating process. You’ll encounter new terminology like down payment, fixed-rate mortgage, closing costs, and more. While becoming a first-time homeowner is a major decision, it comes with some major benefits. A home gives you the ability to find the space that suits your needs. It offers potential tax benefits, the option to refinance later, and it could eventually produce a long-term financial gain by increasing in value. If you want to enjoy the benefits of homeownership, you may wonder where do you begin the process? There are several first-time home buyer programs that offer low rates so you can afford the house of your dreams.

6 Questions to Ask Before Buying Your First Home

Purchasing a home is one of the biggest decisions you will make during your lifetime, and you may be feeling anxious and a bit overwhelmed when getting started. This is normal! Here are six questions to get you focused and make the process even easier and less stressful when applying for a first-time home loan.

1. Do I need a credit report?

Unless you’re paying for your first home in cash, you’ll want to take a look at your credit report before you hit the first open house. You can find a copy of your credit report at annualcreditreport.com at no cost to you, but free access is limited to one request per year. 

You will want to examine your credit reports from the three major credit bureaus (TransUnion, Experian, and Equifax) to look for mistakes and contact the bureaus if you find any errors to file a dispute.

Mistakes can include:

  • Incorrect employers
  • Mistaken account information
  • Accounts that don’t belong to you
  • Late payments you actually made on time
  • Credit injuries which you did not authorize
  • Wrong current and former phone numbers and addresses

In addition to the credit report, you will need your credit score which you can find out by going to Credit Karma or other free websites. Lenders will consult your personal credit score when deciding whether to offer you a home loan. Your credit score will also influence the terms of the loan, including the interest rate.

If your credit score is not as high as you would like it to be, there are steps you can take which can dramatically help. This includes keeping your credit card balance to below 15% of its limit, holding off on opening new lines of credit, credit cards, or loans, and always doing your best to pay your bills on time.

2. Do I need to get pre-approved for a home loan?

Getting pre-approved for a mortgage is a must before you start looking for a home, which means speaking to a lender. The loan officer will look over your credit, and verify your income and assets according to your W2s, tax returns, bank statements, and paychecks.

Having your pre-approval letter is almost a requirement for a realtor to show you houses or have sellers accept any offers you may make.

This letter will likely include the maximum amount they will lend you. This does not mean, however, that you should spend this amount (see point #6). In any case, a pre-approval can give you an idea of what types of houses may be in your budget before you start shopping.

3. How does my loan relate to my down payment?

How much you will need for a down payment depends on the type of mortgage you have.  Loans with lower or no down payment required like FHA loans are typically popular among first-time home buyers.  With an FHA loan, you only need 3.5% of the purchase price of the home as a down payment.

Here are the down payment requirements for other types of home loans:

  • Conventional 97: 3%
  • Conventional loans: 5% - 20%
  • VA loans: no down payment
  • USDA loans: no down payment

Note that not all loan programs will be available to every borrower. For example, VA loans are reserved for active-duty military members, veterans, and, in some cases, the spouses of those who have passed away. USDA loans are only for home purchases within specific geographic areas.

4. Do I need a Real Estate Agent?

As a first-time home buyer, you’re probably looking to save wherever possible. While you may think foregoing a realtor will save money, in reality the cost of hiring one is factored into the price of the home. A good Real Estate Agent, on top of helping first-time home buyers through the often complex process, can also negotiate on your behalf and help you save on the final cost of the home.

5. How can I create a smart homeownership budget?

Homeownership comes with more costs than your monthly mortgage payment—you may also need to account for paying homeowner’s insurance, private mortgage insurance, closing costs, and HOA fees.

FHA loans require private mortgage insurance (PMI), no matter how much you put down. Annual premiums usually fall between 0.8% and 1% of the purchase price depending on how much the loan is and your down payment.

Conventional loans don’t require private mortgage insurance if you can put down 20% or more.

6. What is a debt-to-income ratio?

Your debt to income ratio (DTI) is your monthly income compared to your debt obligations each month. The most your DTI should be prior to factoring in a mortgage loan is 28%, while it should not exceed 50% when you include your mortgage loan. The DTI is one way to measure your ability to pay all of your bills and is often considered by lenders.

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Popular Types of First Time Home Buyer Loans

First time home buyers have a few options when it comes to loans. However, as a first time home buyer, you are probably new to home loan types and could use some guidance. Here are some of the more popular first time home buyer loans to consider.

30 Year Fixed Rate Mortgage

A 30 year fixed rate mortgage offers consistency specific to the interest rate of your loan. The rate will not change throughout the 30 year term of the loan, so it allows you to better estimate and plan your monthly mortgage expenses, which can be very helpful to the first time home buyer.

15 Year Fixed Rate Mortgage 

A 15 year fixed rate mortgage offers the same stability as a 30 year fixed rate mortgage but just a shorter time period. If you can afford to pay more each month, a 15 year fixed rate mortgage often offers better interest rates, which can also be good for the first time home buyer.

VA Loan

A VA loan can be obtained without a down payment and does not require PMI (Private Mortgage Insurance), although it does require payment of a Guarantee Fee unless exempt. This is a great option for veterans who are purchasing their first home.

FHA Loan

FHA loans give the flexibility of buying a home with a lower down payment and credit score, which is something first time home buyers can benefit from.

Learn more about first-time home buyer loan types.

How to Get a First Time Home Buyers Grant

If you've been seriously shopping for a home, then you no doubt have some idea about the house and neighborhood you can afford and the money you want to put toward a down payment to keep your monthly payments manageable.

And it's likely that during your search you've allowed a few compromises to creep into your thinking to make your homeownership dream come true, perhaps persuading yourself that adding 15 minutes to your commute in exchange for a bigger house wouldn't be the end of the world. 

But before you nail down your home-shopping budget, don't forget to explore housing assistance delivered in the form of a grant. Unlike a loan, a grant is money that acts as a subsidy to the recipient assuming certain obligations outlined by the Grantor are met by the recipient.  A grant can be used for a down payment, to offset your loan's closing costs, or even buy that larger house with the extra bathroom you really want.

Sounds great, now show me the money, you say!

The good news is, first-time home buyer grants are out there. The bad news is, they're not always easy to find.  

Use the following grant information to guide and assist you as you proceed down the home buying trail. 

Where to Find First-Time Home Ownership Grants

Who's Got the Money?

The federal government, states, cities, private companies, and nonprofits believe that communities are strengthened through lasting and responsible homeownership. As such, they support and sponsor programs, including grants, to make homeownership more affordable.

As for who gets the money, it's a fairly large tent covering all walks of life – first-time homebuyers, veterans, the elderly, single-moms, farmworkers, first-responders, teachers, people with disabilities, individuals and families who are experiencing homelessness, to name but a few. Indeed, if you're drawing breath, and you're not collecting seven figures in income, you may qualify for some kind of housing assistance grant. The point is, even if you don't think you'll qualify, you may, so don't give up hope or become discouraged that help is only for the destitute.

Where Should You Start Looking?

The easiest place to start would be with your local mortgage lender. Ask if they know of any housing grants or down payment assistance programs. They may offer a lender buydown program, for example, where they may pay a portion of your interest for the first year or two of your loan. This results in benefits that are similar to a grant in that it helps you to buy your home. If they don't know what you're talking about, move on until you find someone who does. 

Also, contact the city where you would like to live. Most cities have housing departments that run affordable/fair housing programs, often supported by federal and state funding. These same cities may have designated special assistance for areas of the city they're seeking to rehabilitate.

For example, many cities receive Community Development Block Grants (CDBG), administered by the Department of Housing and Urban Development (HUD). In turn, cities receiving these grants disperse them through various programs and agencies to address a wide range of unique community development needs, which, of course, includes housing. HUD determines the amount of each CDBG grant by using a formula that weighs a wide range of unique community development needs.

Expand your search, as well, to include housing programs supported by your state. For instance, the California Housing Finance Agency provides a list of CalHFA-approved lenders that first-time buyers can contact to apply for a loan grant. In Texas, a similar agency, known as the Texas Department of Housing and Community Affairs (TDHCA), administers a variety of programs under such titles as the HOMEbuyer Assistance ProgramTexas Bootstrap Loan Program, My First Texas Home and Texas Mortgage Credit Certificate Program.

More Specific Home Buyer Grants

--USDA

The USDA's Rural Housing Repair Loans and Grants program provides loans and grants to very low-income homeowners (below 50 percent of the area median income) to repair, improve, modernize, or to remove health and safety hazards in their rural dwellings. Some USDA loans can be repaid over 20 years at a fixed 1 percent interest rate. Grants of up to $7,500 may be arranged for recipients who are 62 years of age or older and can be used only to pay for repairs and improvements to remove health and safety hazards. Loan/grant combinations may be arranged for applicants who can repay part of the cost. Go to https://www.usda.gov/topics/rural/housing-assistance for more information.

--Mortgage Credit Certificate

Many states have their own version of the MCC, which basically provides you a dollar for dollar deduction off your federal income taxes, up to $2,000. If you don't owe any federal taxes, however, the deduction won't do you any good. By reducing your potential federal income tax liability, you may have more net spendable income to apply toward your monthly mortgage payment. Be sure to consult your tax advisor. 

Go to https://www.ncsha.org/resource/mortgage-credit-certificate-program-qa/ for more information.

--Good Neighbor Next Door

The Good Neighbor Next Door program, sponsored by the Department of Housing and Development, provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers.

Through this program, you can receive a discount of 50 percent on a home's listed price in regions known as “revitalization areas.” Paying less than full price for a property is another form of a grant. You're being granted a sizable price reduction that you don't have to pay back.

Use the program's website to search for properties available in your state. You must commit to living in the home for at least three years. Go to https://www.hud.gov/program_offices/housing/sfh/reo/goodn/gnndabot for more information.

--Veterans Administration Housing Grants for Disabled Veterans

The VA provides grants to U.S. servicemembers and veterans with certain permanent and total service-connected disabilities to help purchase or construct an adapted home, or modify an existing home to accommodate a disability.

Two grant programs exist: The Specially Adapted Housing (SAH) grant and the Special Housing Adaptation (SHA) grant. The maximum amount available to adapt a family member's home for the SAH grant is $35,593 and for the SHA grant is $6,355. For more information, go to https://www.benefits.va.gov/homeloans/adaptedhousing.asp 

Finding the Right Home Buyer Grants

The above list is by no means complete; rather, it's a start. New assistance programs are forming all the time while others have expired or run their course after meeting a short-term need.

At the same time, while conducting your search for assistance, keep your guard up for websites or for-profit companies that promise to help you find any kind of funding you need for “a small fee.” Many of these organizations have names that imply an association or direct relationship with the U.S. government, when there's no connection whatsoever. So, steer clear!

Again, your best route for seeking and finding grants to further your housing quest is to first work with professionals who have their feet firmly embedded on the ground in the areas where you want to live.  Start with your local lender or your city's housing department. They should be knowledgeable about the current housing assistance programs for which you may be eligible.

Be persistent. While it's true there are no free lunches, sometimes there is assistance with no obligation to pay back assuming certain requirements are met for those diligent and determined enough to go looking for it.

Tips for First-Time Home Buyer

1. Do your research.

You want to know how much you can afford to spend on a home before a loan officer tells you how much you qualify for. Why? You want your investment to be a sound one, made with premeditation and an understanding of your buying power.

If you are barely starting out, research can help you determine what you need to do now to purchase a home in the future. In essence, research can help you create a home buying blueprint for yourself.

On top of the federal programs which offer beneficial terms to first-time home buyers such as FHA and VA loans, certain states have their own assistance programs which may offer help with closing costs, down payment assistance, tax credits, or discounted interest rates.  It may be well worth your time to also research what your state or county may offer.

2. Stay on top of your credit.

Since your credit score is such a huge factor in buying a home, monitoring it is vital.  Monitoring your credit shouldn't only be a priority when you are thinking about purchasing a home; overseeing your credit is something that should be done as soon as you start using and building your credit.

You want to make sure that everything on your credit report belongs to you and installment payments have no late fees.

Keep your credit score from dropping once you apply for a mortgage by not opening new credit accounts such as a credit card or an auto loan until your home loan closes.

Did you know you can access your credit report free once a year? Visit: Annual Credit Report

3. Understand your assets & liabilities.

Assets are another important aspect of purchasing a home. It's all about understanding your monthly cash flow. Lenders will focus on how you spend your money, focusing on how much money you have left over every month based on your debt–to–income ratio.

4. Organize your paperwork.

Sometimes the home buying process is delayed for seemingly minor reasons—missing paperwork is one of them. If you do your research as mentioned above, you will likely find that lenders ask for proof of income and taxes. Having this documentation on hand can make the process a lot smoother and stress-free.

A good rule of thumb is to save 2 months' worth of bank statements and paystubs and 2 years of tax returns and W-2s in an easily accessible place (for you). Make sure you update your bank statements and paystubs every 2 months and your taxes and W-2s every year.

5. Get pre-qualified for a home mortgage.

After following the above tips, your next most important step before thinking about purchasing a home is finding a lender to pre-qualify with. It's never too early to consult a lender.

If you need to make any corrections on your credit report or gather a little more money for the down payment, you want to make sure you aren't pressured or running against the clock to work out any kinks. Getting pre-qualified lets you (and home sellers, for that matter) know that you are a serious buyer with access to financing, not a lookie-loo.

First-Time Home Buyer Mistakes to Avoid

Estimate What You Can Afford

Use our handy mortgage payment calculator to determine the amount you can afford to spend on monthly payments based on your current income and expenses

If you're unfamiliar with mortgages, we have resources on first-time home buyer loans and a Mortgage Glossary that can help educate you on the home buying process.

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