A First-Time Homebuyer Guide
First Steps for a First-Time Homebuyer
Buying your first home can be an intimidating process. You’ll encounter new terminology like mortgage rates, down payment, fixed-rate mortgage, closing costs, mortgage calculator and more. While becoming a first-time homeowner is a major decision, it comes with some major benefits. A home gives you a space to make your own as well as providing you with a physical asset. It offers potential tax benefits, the option to refinance later, and it could eventually produce a long-term financial gain by increasing in value. It is also one of the most significant ways to build generational wealth.
There are many things to take into consideration when buying your first home. It’s a complex process, but doing your research and using an experienced lender like New American Funding can help you navigate the steps to achieve your dream of homeownership.
What is a First-Time Homebuyer?
Generally, a first-time homebuyer is considered to be anyone who has not owned a principle residence in the last three years. However, the U.S. Department of Housing and Urban Development (HUD) has various other circumstances under which homebuyers qualify as first-time homebuyers that we will cover later in the article.
There are several benefits to being a first-time homebuyer. They include:
- Down payment assistance: There are many down payment assistance programs available to first-time homebuyers. They can include government programs at both the state and local levels, programs offered by non-profit organizations, as well as lender-offered programs.
- Low or no down payments: There are several loans that may be available to first-time homebuyers that offer low or no down payments. These include, FHA, VA, and USDA loans. Each loan comes with its own set of unique applicable qualifications in addition to the requirements of the lender offering them.
- Educational resources: There are many educational resources available for first-time homebuyers. They are offered by a variety of organizations including government agencies like the HUD, private companies like Fannie Mae, and non-profit organizations.
- Closing costs assistance: There are many options for first-time homebuyers to receive assistance with closing costs. They can include government programs, non-profit organizations, and private lender programs.
Qualifications of a First-Time Homebuyer
HUD sets the national standards for who qualifies as a first-time homebuyer. They have listed the following eligibility guidelines on their website:
- An individual who has not owned a principal residence for three years.
- A single parent who has only owned a home with a former spouse while married.
- A displaced homemaker who has only owned a home with 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.
First-Time Homebuyer Programs
Down Payment Assistance
Coming up with a down payment can be one of the more intimidating parts of buying a home, especially for first-time buyers. Different loans require different down payment amounts and the amount that you are able to put down affects which loans you can qualify for as well as the terms and conditions associated with that mortgage.
For instance, FHA loans require a down payment amount of 3.5%-10%. However, putting down 3.5% will result in higher mortgage rates than if you were to put down 10%.
There are many down payment assistance programs available to first-time homebuyers. These include:
- Pathway to Homeownership: This is one of NAF’s latest homebuyer programs. Specifically available to first-time homebuyers, eligible borrowers may receive up to $8,000* in financial assistance. This money can be used to help with your down payment, closing costs, or other costs depending on what you qualify for. It can also be combined other DPA programs.
- State and local resources: HUD has a library of state-by-state resources for down payment assistance. These programs can include government assistance as well as private companies and non-profit organizations. Simply go to state information and select your state to learn what programs may be available to you.
- DPA Loans and grants: There are a variety of options available for down payment assistance loans and grants. Check with your NAF Loan Officer to see which programs might be available to you.
Tax Deductions
There are several tax deductions that may be available for homebuyers. These include deductions on your property tax, mortgage interest, as well as deductions for energy efficient upgrades to your property. Make sure to consult with an accountant to find out which deductions you might qualify for.
Homebuyer Education
There are many educational programs available for first-time homebuyers. There are resources available at the federal, state, and local levels. Research programs and talk to your Loan Officer to see which ones might be beneficial for you.
Federal First-Time Homebuyer Programs
Government-Backed Loans
Home loans generally fall into one of two categories. Conventional loans that are backed by Fannie Mae and Freddie Mac, which are private entities, or loans that are regulated and insured by the federal government.
Loans that are insured by the federal government have different qualifications, terms, and conditions that are set by their various agencies. Lenders can also be more flexible with certain requirements since these loans pose less risk to them due to their government guarantees. This can make them particularly beneficial to first-time homebuyers who may have concerns about limitations involving their credit scores or ability to pay a down payment as high as 20%.
The three most popular types of government-backed home loans are:
FHA loans: FHA loans are home loans that are guaranteed by the Federal Housing Administration. The FHA does not administer the loans itself, but it works with approved lenders, like New American Funding, to administer these mortgages. FHA loans are popular with first-time homebuyers due to their more flexible credit, DTI, and down payment options.
FHA loans allow a minimum credit score of 500-580 depending on how much down payment you are able to put down. The down payment requirement is 3.5%-10% depending on your credit score and your DTI can be as high as 57% under certain circumstances.
USDA loans: USDA loans are mortgages that are guaranteed by the U.S. Department of Agriculture. They do not require a down payment, but you may be able to lower your interest rate by putting more money down. USDA loans allow for a minimum credit score of 580 and they allow for closing cost assistance.
USDA loans also have 100% financing for qualified borrowers and do not require private mortgage insurance (PMI). There are no occupational requirements to qualify, however the property must be in an eligible geographic area. You can search the address of the property you are interested in to see if it qualifies.
VA loans: VA loans are mortgages that are guaranteed by the U.S. Department of Veterans Affairs. VA loans are only available to eligible veterans, military servicemembers, and spouses. They were designed to enable military members to achieve their dreams of homeownership and come with many benefits.
VA loans also do not require a down payment, they offer lower interest rates, and have no monthly mortgage insurance premiums.
In addition to the federal requirements of each loan, there will be other applicable requirements and qualifications from your lender. Contact NAF today and one of our Loan Officers will be happy to answer your questions and help you find the right loan program for your unique needs.
First-Time Homebuyer Step-by-Step
Step 1: Assess your finances
Credit: Your credit score is a significant factor in which loans you can qualify for as well as the terms and conditions of those loans. Different loans require different minimum credit scores. For instance, Conventional home loans require a minimum of 620, while an FHA loan can go as low as 500 with a certain down payment amount.
Lenders don’t just look at your credit score. They also view your credit and repayment history. They take into account how many lines of credit you have open as well, how consistently you make payments, as well as how much credit card debt you have overall.
When you go to apply for a loan, you’ll want to check your credit score first, so you have a good idea of what to expect. If your score is low, consider taking steps to raise it before applying for a home loan. NAF has partnered with Uqual, a loan readiness company, to give borrowers an opportunity to increase their ability to qualify for a loan. Uqual provides tools and resources, like credit management, to help borrowers build up their financial situation to improve lendability.
Debt-to-Income Ratio (DTI): Your 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.
Down payment: How much you will need for a down payment depends on the type of mortgage you have as well as your credit score when you apply. 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: 3% - 20%
- VA loans: no down payment
- USDA loans: no down payment
Earnest Money: Earnest money is also called a “good faith deposit.” It’s a sum of money that a borrower puts down, usually around 1%-3% of the sale price, to display your buying commitment to the seller. This money is usually held in an escrow account then, if the sale goes through, it is applied to your down payment or closing costs. The money is given with mutually agreed upon contingencies to protect both parties should various situations arise.
Earnest money is not always required, but can give you a competitive edge should you choose to offer it.
Step 2: What type of mortgage to get?
Fixed or Adjustable: “Fixed” vs “adjustable” refers to the relationship between mortgage rates and your loan agreement. A mortgage rate is the interest rate you pay on your home loan. They change daily and are influenced by fluctuations in the market including current affairs, economic shifts, and government decisions.
A Fixed-Rate loan is a loan structure where the interest rate stays the same over the life of the loan. An Adjustable-Rate mortgage (ARM) has an interest rate that can adjust periodically depending on the terms of the loan.
Fixed-Rate loans offer the stability of predictable monthly loan payments that won’t be influenced by changes in the market. This can make it easier for borrowers, particularly those buying a home for the first time, to budget and save since there won’t be any surprises.
Adjustable-Rate loans offer higher upfront savings initially with lower introductory rates and smaller monthly payments. However, once the introductory period is over, the loan will continue to adjust periodically to different market rates over the life of the loan.
Loan Types:
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 helps you plan your monthly mortgage expenses, which can be very helpful to the first-time homebuyer.
A 15-Year Fixed-Rate mortgage offers the same stability as a 30-Year Fixed-Rate mortgage but with 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 homebuyer.
A Conventional loan is the most common home loan. It has fewer restrictions that certain government loans and lenders can choose terms based on their specific borrower. A Conventional loan requires a minimum down payment of 3%, but they will require PMI if you put down less than 20%.
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 can be a great option for veterans or servicemembers who are purchasing their first home.
FHA loan
An FHA loan gives borrowers the flexibility of buying a home with the benefits of a lower down payment and less stringent credit requirements. FHA loans are some of the most popular home loans amongst first-time homebuyers due to their less strict qualifications for approval.
USDA loan
A USDA loan offers no down payment requirement and also accepts less-than-perfect credit scores. They do have geographic limitations, so make sure to check to see if the property you want to buy is eligible.
Explore more loan options offered by NAF and talk to our Loan Officers to find out which program is right for your unique needs.
Step 3: Get a quote from your lender
Step 4: Get pre-approved for a mortgage
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 real estate agent 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 that you have to spend the full amount. It is best to consider your options and not take out more than you are comfortable with.
Pre-approval can give you an idea of what types of houses may be in your budget before you start shopping.
Step 5: Find a real estate agent
Finding a reliable real estate agent is a key part of the homebuying process. Take your time and choose an agent you are comfortable with. NAF Homes**, an affiliate of NAF, can connect you with local real estate agents and agencies in your area.
Step 6: Shop for your dream home
Enjoy the process of shopping for the home of your dreams. Visit open houses, check listings, and drive through neighborhoods you’re interested in to see if anything catches your eye.
Step 7: Hire a home inspector
You’ll want to hire a home inspector before you make an offer on a home that you like. A home inspection will tell you what state the house is in and let you know any needed repairs. They’ll examine the house in detail, looking for things like potential water damage, rotting wood, and other damage that will need to either be repaired before you close on the home or that you and the seller will come to an agreement on about whose responsibility it is.
Having your home inspected is often a lender requirement for loan approval.
Step 8: Be prepared to make an offer
When preparing to make an offer on a home, you’ll need to keep several factors in mind. Consider your budget and the current conditions of the market, as well as the costs of any needed repairs that you’ll be responsible for. You can also research the area to contextualize the seller’s asking price.
Step 9: Negotiate closing costs
Negotiating closing costs is a common practice that can be particularly beneficial to first-time homebuyers. Closing costs are the final fees and costs that homebuyers have to pay before they complete the purchase of their house. Closing costs are usually between 2%-5% of the home’s purchase price and can include things like the appraisal fee, processing fee, and transfer taxes.
You can negotiate closing costs with your seller, your lender, and your real estate agent.
Step 10: Find homeowners insurance and close on your home
For more Do’s and Don’t’s for first-time homebuyers, explore the rest of our resource center for first-time homebuyers.
First-Time Homebuyer FAQs
How Much do Most First-Time Homebuyers Put Down?
According to the National Association of Realtors, in 2022, “The typical down payment for first-time buyers was 6%, while the typical down payment for repeat buyers was 17%.”
What is a Good Debt-to-Income Ratio When Buying a Home?
Different loans allow for different DTI. However, lenders generally prefer a maximum DTI of 43%.
Do I Need a Mortgage Pre-Approval Before Looking at a House?
Pre-approval is not required for when looking for a house. However, it is a very beneficial tool that can give you an advantage not just in the housing market, but also in your own planning.
Getting pre-approved for a loan before looking for a home can help you because it let’s you know exactly how much you can afford to spend on a house. It can also give sellers a greater sense of security about accepting your offer since you’re already in a position to get approved for the home loan.
What is PMI (Private Mortgage Insurance)?
Private mortgage insurance is mortgage insurance for Conventional home loans. It is required if borrowers pay a down payment of under 20%. There are several ways to potentially avoid PMI. If you can put more than 20% down on your home you will not have to pay PMI.
In addition, once you reach certain equity markers there are options for cancelling your PMI. You may also be able to refinance your loan to a different loan, which may allow you to eliminate PMI.
*Due to maximum seller concession rules, discount can be less than $25,000 in some cases where other concessions have been made to the consumer.
**NAF Homes, Inc. (“NAF Homes”) has a business relationship with NAF Cash, LLC (“NAF Cash”) and New American Funding, LLC (“NAF”). NAF Homes, NAF Cash and NAF are affiliates with the same beneficial owners. As a result, the referral of a customer by NAF Homes to NAF Cash or NAF may provide NAF Homes, its affiliates and/or its employees with a financial or other benefit. You are not required to use NAF Cash or NAF as a condition of the purchase, sale or refinance of the subject property or to obtain access to any settlement service.