Ask Penny: I’m ready to buy a house. What do I need to know about how to qualify as a first-time homeowner?

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Hi Penny — I’m ready to buy a house. What do I need to know about how to qualify as a first-time homeowner?  —Excited Future Homeowner

Hey Excited Future Homeowner,

I’m thrilled that you’re ready to own a home! A solid understanding of things like typical homebuyer requirements and how to get preapproved as a first-time homebuyer can help you with the process — and with making decisions that fit your budget and lifestyle.

All of this info may be overwhelming at first, but you’ll start feeling more confident pretty quickly once you get informed and do a little homework.

Who qualifies as a first-time homebuyer

Did you know that you may be considered a first-time homebuyer even if you’ve bought a home before? Surprising, right?

Here’s how it works: A first-time homebuyer also includes someone who hasn’t owned a home in three years or more. The Federal Housing Administration, or FHA, says you may also qualify as a first-time homebuyer if you’re …

  • A single parent who only owned a home with a former spouse while you were married.
  • Someone who hasn’t been in the workforce for a while but has cared for your home or family and only owned a home with a spouse.
  • Someone who has only owned a mobile home or another type of property that wasn’t attached to a permanent foundation.
  • Someone who has only owned a property that didn’t meet state, local or model building codes and couldn’t be brought up to code for less than the cost of building a new property.

Typical first-time homebuyer requirements

You probably already know that moving is considered one of the most stressful things you can do. If you’re a first-time homebuyer, a big contributor to that stress may be all the requirements you need to meet for your loan.

These requirements depend a lot on the mortgage and home loan program you choose. Here’s a quick overview of credit score, down payment and other requirements for different types of mortgages.

  • Conventional loans: Conventional mortgages — those backed by a private lender like a bank versus a government program — may be a good option if you have a strong credit history. These loans tend to have lower interest rates. But you may need to pay private mortgage insurance, or PMI, if you put down less than 20%. To qualify for a conforming loan — a type of conventional loan that’s backed by Fannie Mae and Freddie Mac — you’ll generally need a minimum credit score of 620; a debt-to-income ratio, or DTI, that doesn’t exceed 50%; and a minimum amount of cash on hand. You’ll also be limited in how much you can borrow — the limit for a one-unit property in 2021 is $548,250 in most locations. But the good news is that you may qualify for a down payment as low as 3%.  
  • FHA loans: FHA loans are federally insured and may make sense if you don’t have the best credit. You may qualify with a FICO® score as low as 500 as long as you have a 10% down payment. If your credit score is 580 or higher, you may be able to put as little as 3.5% down. You’ll also need a debt-to-income ratio below 43%, steady income and proof of employment. It’s also worth noting that you’ll need to pay an annual mortgage insurance premium if you’re approved for the FHA loan. In 2021, the FHA loan limit is $356,362 for a one-unit property, so you may not qualify if you plan to buy a more expensive home.
  • USDA loans: A USDA loan is also backed by the government and can help you buy a home in an eligible rural area. You likely won’t need to make a down payment, but you’ll need to meet the income requirements for the area where you wish to buy a home.
  • VA loans: If you’re a veteran or service member, you may be able to qualify for a Department of Veterans Affairs-insured VA loan, even if you have poor credit. VA loans don’t require you to pay PMI, and as long as the home’s purchase price isn’t higher than its appraised value, you won’t be required to make a down payment.

How to get preapproved as a first-time homebuyer

Getting preapproved can help you in your home-buying journey in a few ways. A mortgage preapproval letter from a lender states that you’re conditionally approved for a specific loan amount. With a preapproval, you can find out how much home you can afford, position yourself as a serious buyer to sellers and choose the best interest rate and terms for your situation. Just keep in mind that preapproval isn’t a guaranteed loan offer.

Consider applying for preapproval when you’re ready to get serious about buying a house. Some preapproval letters expire within 30 to 60 days. To get preapproved, a lender will need to check your credit, employment history, income and financial assets and may ask for documents such as pay stubs or tax returns. It’s a good idea to get preapproved with multiple lenders within a 14-day period. While the time frame can differ, many credit-scoring models consider multiple inquiries within a two-week window as just one hard credit inquiry.  

Research first-time homebuyer programs

You can look to a bunch of resources to get help with buying a home. The government (federal and state) and even some lenders want to get in on the action of helping first-time buyers like you. These programs come with their own specific requirements and offer benefits like competitive interest rates, assistance with a down payment and closing costs, discounts and tax credits.

For example, the Department of Housing and Urban Development’s Good Neighbor Next Door program offers law enforcement officers, teachers, firefighters and emergency medical technicians a discount of up to 50% off the price of a home in an eligible area. In exchange, they must agree to live in the home as their principal residence for at least three years.

Take the time to research these programs before you purchase a home so that you don’t miss out on any assistance available to you. If you need help, reach out to a loan officer or housing counselor. They can help you identify available programs and guide you through the home-buying process.

About the author: Penny is Credit Karma’s conversation maven. If you’re a Credit Karma member and have had a question about your financial situation, you might have chatted with Penny about it in the Credit Karma app. Now, Penny wants… Read more.