21 first-time home buyer questions, answered

Gina Pogol
The Mortgage Reports contributor

Buying your first home starts here

Buying a house is a lot to wrap your head around — especially as a first-time home buyer. But if you know what to expect, it doesn’t have to be stressful or confusing. 

The home buying process can be broken up into phases, making it a lot easier to approach.

The guide covers the very first phases: figuring out how much house you can afford, and how to finance the purchase. 

Other steps, like house hunting, can’t happen until you have those basic finance questions answered. 

So if you’re brand new to home buying, this is the place to begin.

Verify your home buying eligibility (Aug 14th, 2020)

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Basic advice for first time home buyers

You can’t know everything there is to know about buying a home — especially when you’re a first time home buyer. However, you can do a little research and put yourself in position to succeed.

The more you know, the better off and less stressed you’ll be. You may even get a better deal on your home loan.

If you’re just getting started, there are a few key tips to keep in mind before diving in: 

  1. Contact at least three mortgage lenders to ensure you’re getting the lowest rate. Many first time home buyers make the mistake of going with the first lender they talk to, and miss out on thousands of dollars of savings
  2. Learn about different types of home loans. While there are dozens of loan types, more than 90 percent of buyers will end up using one of four major loan programs: Conventional, FHA, VA, or USDA. Find out which one best fits your needs — there are options for low down payment, low credit score, self-employed, large loan size, and more
  3. Understand your price range and monthly payment. Calculate your mortgage payment, including principal, interest, taxes, and insurance. Understand your mortgage rate as well as your budget. This will allow you to shop for a home and a mortgage with confidence

If you keep these three things in mind, you can maximize your home buying budget and get the best mortgage deal for your new home. 

Verify your home buying eligibility (Aug 14th, 2020)

What is a mortgage? 

According to the National Association of REALTORS®, only about 10 percent of buyers purchase homes with all cash. Everyone else has to borrow at least some of the money to buy their new home. This is done with a special type of loan called a mortgage. 

So, what makes a mortgage different from other types of loans? 

  • Lower interest rates — under 4% annually, at the time of writing this article
  • Longer repayment periods — most people pay off their mortgage over 30 years
  • Rates and payments are generally fixed — most people “fix” their mortgage interest rate so that their monthly payment will stay the same over the whole loan period (unless they choose to refinance) 
  • The loan is “secured” — mortgages are secured by the value in your home; if you fail to make payments, the mortgage company can take back (“foreclose”) your house to recoup its losses

In rare cases, you can use a mortgage to cover the whole purchase price of the home. 

But most people put some of their own money toward the purchase. The amount paid out of pocket is known as the “down payment.” The mortgage covers what’s left over. 

For example, if you bring $25,000 of your own money to a $250,000 home purchase, you have made a 10 percent down payment.  The remaining amount — $225,000 — is covered by your mortgage. 

How much down payment do I need for a house? 

Many first time home buyers believe they have to put 20 percent down on a home. But that’s far from true. In fact, the average down payment for first time home buyers is only 6 percent. On a $250,000 home purchase, that would be just $15,000. 

And there are loan programs that let you buy with even less than 6 percent down. For example: 

  • FHA loans — 3.5% down 
  • VA loans — 0% down 
  • USDA loans — 0% down 
  • Conventional 97 loans — 3% down 

Some of these programs have special requirements, and others are available to the general public (we’ll get into more specifics about loan programs below.) 

The main takeaway here is that down payments are flexible. 

Yours should depend on your income, what you currently have saved, how expensive the home is, and what your overall home buying goals are. 

Briefly, the pros and cons of bigger versus smaller down payments are: 

  • Bigger down payment = lower interest rate 
  • Bigger down payment = lower monthly payment
  • Smaller down payment = stop paying rent, buy a home sooner 
  • Smaller down payment = start building equity faster

So take a look at your own finances and home buying goals to figure out the right down payment for you. The article link below might help. 

>> Related: The average down payment, and when to put down more or less

Why do people say you need 20% down? 

Average down payments are well under 20 percent. You might wonder, then, why so many people think 20 percent down is the minimum. 

It’s because 20 percent down gets you out of paying for something called “mortgage insurance.” 

Mortgage insurance is an extra charge on your monthly mortgage bill — and it can sometimes be expensive. Think, over $100 per month. 

Understandably, most buyers would rather avoid paying for mortgage insurance if possible. That’s why some people aim for 20%. 

But there are benefits to paying mortgage insurance if it puts you in a home sooner. It’s just one more cost versus benefit to consider as you put together your home buying budget. 

>> Related: Mortgage insurance: what it is, why you need it, what it costs

Do I have to pay the down payment out of pocket? 

Most mortgage programs require a down payment, however small or large. Theoretically, this is money you put toward the home purchase out of your own pocket. But there are ways to avoid that and still come up with the cash required to get a loan. 

One way is to find a down payment assistance program in your area. 

Down payment assistance programs — usually run by local governments — offer up grants or ultra-low interest loans to help first time home buyers make their required down payments. 

>> Related: State-by-state guide to down payment assistance programs

You can also use gift funds for a down payment on a mortgage. To use a cash gift for down payment, however, you’ll have to prove that they come from an “acceptable source.”

That means providing a paper trail showing the gift funds leaving the giver’s account, and being deposited into your account or into escrow. 

You’ll also need a “gift letter” from the giver, indicating his or her relationship to you, the amount of the cash gift, and a statement that the giver does not require repayment. There is no limit to the number of money that can be gifted to a home buyer.

>> Related: How to give and receive a cash down payment gift

What first time home buyer loans are available?

Home buyers today can choose among dozens of loan types, but more than 90 percent of buyers (including first time home buyers) will end up using one of four popular loan programs. These are: the conventional home loan, the FHA home loan, the VA home loan, and the USDA home loan.

These programs are popular because of their accessibility, low rates, and friendly terms. Each one has unique benefits, depending on what you’re looking for as a first time home buyer (lower down payment, lower credit threshold, lower-income options, etc.) 

Here’s a brief overview of each one. 

The conventional loan — 3% down for first-time home buyers with better credit 

Conventional or “conforming” mortgage loans are what most home buyers think of when they think of home loans. The term “conforming” means that these loans meet guidelines established by two quasi-government entities — Fannie Mae and Freddie Mac.

Conforming mortgages are often the best choice for home buyers with good credit scores and a down payment of at least 10 percent.

However, three conforming mortgage options exist for buyers making a down payment of just three percent. They are the HomeReady™, HomePossible, and the Conventional 97 home loans.

HomeReady and HomePossible mortgages offer low down payments (starting at 3%) and flexible eligibility guidelines, especially for lower-income home buyers. They may even offer up to a $500 rebate to borrowers. 

Conventional 97 mortgages offer no such discount but can be the most economical way to purchase a home with little money down (just 3%) — especially for buyers with extra-good credit.

Check your conventional loan eligibility. Start here (Aug 14th, 2020)

The FHA loan — 3.5% down for first-time home buyers with lower credit 

FHA loans are popular with borrowers who have smaller down payments and/or credit issues, which require extra underwriting flexibility. The biggest appeal of the FHA loan is that buyers with below-average credit can get mortgage approved.

FHA loans allow buyers with credit scores as low as 580 with 3.5% down and 500 (with 10% down). However, low credit scores must not be the result of recent bad credit history.

FHA mortgage rates are often lower than conforming mortgage rates, but because all FHA loans require mortgage insurance premiums (MIP), the overall cost of an FHA loan is sometimes higher.

FHA mortgage insurance costs are as follows: 

  • Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for recent FHA loans and refinances
  • Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount most FHA loans and refinances

Note — FHA mortgage insurance usually lasts the life of the loan. But it can eventually be cancelled with a refinance once you’ve built equity in the home. So FHA mortgage insurance is not always “forever.”

Check your FHA loan eligibility. Start here (Aug 14th, 2020)

The VA loan — 0% down for first time home buyers with military ties

The VA loan is a great program, with benefits offered by no other loan. But you need to be associated with the military to be eligible.

Available to veterans and active members of the U.S. military, VA loans offer 100 percent financing, simplified loan approval standards, and access to the lowest mortgage rates available.

For the last two years, VA mortgage rates have consistently beat rates for all other common loan types. VA mortgage rates can be as much as 40 basis points (0.40 percent) lower than rates for a comparable conventional loan.

Check your VA loan eligibility. Start here (Aug 14th, 2020)

The USDA loan — 0% down for first time home buyers in rural areas

Available in rural areas and low-density suburbs, the USDA loan is another no-money-down mortgage you can use to finance a home.

The USDA loan offers lower mortgage rates, zero down payment, and cheaper mortgage insurance to borrowers with low to moderate income. 

The only catch? The home has to be in a designated “rural” area according to USDA standards. That usually means it has to be located in a city with a population of less than 20,000. 

Check your USDA loan eligibility. Start here (Aug 14th, 2020)

Compare first time home buyer programs

  Minimum Down payment Minimum Credit Score Upfront Fees Mortgage Insurance What you need to know
VA Home Purchase 0% Officially, none, but lenders are allowed to set their own minimums 0% None Only service members, veterans and surviving spouses are eligible.
FHA Home Purchase 3.5% for applicants with credit score of 500/579 Officially, 500 for a 90% loan and 580 for a 96.5% loan. Lenders often set higher minimums. 1.75% upfront mortgage insurance premium (MIP) which can be wrapped into the loan. .85% of the existing loan balance per year for most buyers, but ranging from 45 to 1.05% FHA is not restricted to first-timers or low-income buyers.
USDA Home Purchase 0% Typically, lenders require a 640 score 1.00% upfront mortgage insurance (MIP), which can be wrapped into the loan.  .35% of the existing loan balance per year, paid monthly USDA is not restricted to first-timers or low-income buyers
Home Ready/Home Possible Purchase 3% 620 if manually underwritten, none if underwritten electronically and approved 3% 3% Offered by Fannie Mae and Freddie Mac to borrowers who meet specific income criteria or buy properties in
Other Conforming Home Purchase 3% for first-time buyers, 5% for highly-qualified repeat buyers 680%+ for LTV > 75%, 620 for LTV > 75% 3% for first-time buyers, 5% for highly qualified repeat buyers 3% for first-time buyers, 5% for highly-qualified repeat buyers 5% for highly-qualified buyers
Non-conforming (Jumbo) Home Purchase 5% for highly-qualified buyers Not standard, but generally 680+ 5% for highly-qualified buyers 5% for highly-qualified buyers  Underwriting is strict for large loans. These are not standard and must meet requirements of investor or…

Are there first time home buyer grants?

First time home buyer grants are often available at the state or local level. These are typically known as down payment assistance (DPA) programs, which can help cover all or part of your down payment and closing costs. 

These are real savings for first time home buyers. One study estimated that buyers using down payment assistance saved almost $6,000 at closing, on average, and another $11,000 over the life of their loans. 

Down payment assistance usually takes one of two forms: 

  • A first time home buyer GRANT — money given to you that you don’t have to pay back 
  • A low-interest LOAN — money borrowed to cover your down payment or closing cost that you’ll have to pay back with minimal interest 

First time home buyer grants vary in size and availability depending on where you live. There are also different requirements to qualify for assistance depending on which program you use. 

Since DPA programs are so diverse, we won’t go into the details here. But you can check our complete guide for information about first time home buyer grants and loans in your state. 

>> Related: State-by-state guide to down payment assistance 

How much house can I afford? 

Once you’ve decided which mortgage loan type works best for you, you’ll want to begin thinking about your monthly budget and how much home you can afford.

It’s up to you to figure this out. A bank can’t do it for you. So, first, determine your monthly budget and write that number down.

For this example, let’s say you’re aiming for a mortgage payment of $1,500 per month.

We’ll now work backward to determine your maximum home purchase price.

Calculate your monthly mortgage payment (PITI) 

Your mortgage payment is made up of four parts, collectively known as PITI — Principal + Interest, Taxes, and Insurance.

Principal + Interest is your basic mortgage payment. It’s based on your loan amount, interest rate, and your loan term (the number of years you have to repay it).

You’ll also need to budget for real estate taxes. As a homeowner, you’re responsible for paying an annual real estate tax to the local taxing authority. Taxes typically range from 1-2 percent of your home’s value annually.

Then, there’s homeowners insurance. Mortgage lenders require that you carry insurance for your home, which typically costs 0.25-0.50 percent of your home’s value annually.

So, assuming a home purchase price of $250,000 and a ten percent down payment, plan on setting aside $400 for taxes and insurance each month.

This leaves $1,100 to spend on principal + interest.

Find your mortgage rate and price range

Determining whether a home is “in budget” depends on your principal + interest payment. And your principal + interest payment depends on current mortgage rates.

Be aware that mortgage rates move up and down all day, every day. Over the course of weeks and months, rates can change by 50 basis points (0.50 percent) or more.

When you’re shopping for a home, especially over an extended time period, it’s important to observe mortgage rates and how they are trending.

Consider the above example, when you have budgeted $1,100 to spend on principal + interest each month.

  • With mortgage rates at 3.75 percent, the payment is $1,043. The home is in-budget.
  • With mortgage rates at 4.25 percent, the payment is $1,107. The home is out-of-budget.

This example shows why you should never shop for homes by “price range.” The same home is affordable when rates are low, and unaffordable when rates increase.

Adjust your target price range based on current mortgage rates. It’s the only true way to keep on budget.

>> Related: Mortgage rates today, August 14, 2020

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What credit score do I need as a first-time home buyer? 

Your credit score makes a big difference when you buy a house. It affects your loan options, mortgage, rate, and home buying budget. This can sometimes be a concern for first time home buyers who might not have “excellent” credit. 

For reference, credit scores are generally classified this way: 

  • 720+ = Excellent
  • 680 to 719 = Good
  • 620 to 679 = Fair
  • < 620 = Poor

Those with credit scores in the “excellent” range will usually have access to the most favorable loan programs and lowest rates. 

But those with fair to good credit scores have options, too. Here are the typical credit score requirements for the most popular first time home buyer programs: 

  • Conventional loan — 620+
  • FHA loan — 580+
  • VA loan — 620+
  • USDA loan — 640+ 

It becomes more difficult to find mortgage financing in the below-620 range. 

Technically FHA loans are available with a credit score as low as 500 — but only if you can make at least a 10% down payment. And it can be hard to find lenders that are actually so lenient. 

Similarly, VA loans have no credit score minimum by default. But most lenders impose their own minimum credit score of at least 620 for VA loans. 

Start checking your credit well before you plan to buy a house — at least a year in advance if possible.

This will give you time to flag errors on your report, solve them, and even work on raising your score if that’s necessary to get a loan. 

Remember: A higher credit score = a lower mortgage interest rate = a lower monthly payment OR a bigger home buying budget. 

Any way you slice it, it’s in your favor to have the best possible credit score when you try for financing. 

>>Related: Guide to building good credit: 5 ways to improve your FICO score 

How to choose a mortgage lender as a first time home buyer

One of the biggest mistakes first time home buyers make is not shopping around for a mortgage. They might simply get a loan from the bank they already use for checking and savings. Or they might get a quote and go with the first lender they speak to, assuming rates and prices are the same everywhere. 

In fact, that’s not true. Lenders have a lot of flexibility with the rates they offer. For a single borrower, mortgage rates could potentially vary as much as 0.5% from one company to another. 

0.5% might sound small. But over the first three years of a $250,000 loan, that difference would save you almost $4,000. 

So, make sure you get estimates from a few different lenders to find the best rate and fees before you commit to a home loan. 

What’s the best mortgage lender for first time home buyers? 

Most mortgage companies offer the low-down-payment and flexible credit loans popular with first time home buyers. A few of our favorite companies from our review of the best mortgage lenders include: 

  • Fairway Independent Mortgage — min. credit score 580
  • Guild Mortgage Company — min. credit score 620 
  • Quicken Loans/Rocket Mortgage — min. credit score 580
  • U.S. Bank — min. credit score 620
  • loanDepot — min. credit score 580
  • GuaranteedRate — min. credit score 580
  • USAA — min. credit score 620 (veteran loans only) 

The right choice comes down to deciding what loan type you need, and comparing offers for that type of loan from a few different companies. 

We recommend checking rates and fees from at least three lenders to be sure you’re getting the best deal. 

Compare offers from up to four lenders at once (Aug 14th, 2020)

First time home buyer FAQ 

What is available for first time home buyers?

As a first time home buyer (or repeat buyer), the homes available to you depend on how much mortgage you qualify for. First time home buyers can use any of the mortgage programs available, provided they’re financially eligible. That includes conventional loans, FHA loans, USDA loans, and VA loans. First-time buyers might also have access to special loans, grants, and home buyer courses that offer savings on down payments and closing costs. 

Availability of these programs depends on where you live, and there may be special requirements to qualify. Learn more about first time home buyer assistance programs here.

What credit score do you need to buy a house for the first time?

Most loan programs require a credit score of 620 or higher to buy a house for the first time. That includes conventional loans, most VA loans, and USDA loans (which require 640+). For those with lower credit, it may be possible to get an FHA loan with a score as low as 500, and a 10% down payment. But not all FHA lenders allow scores that low, so shop around. 

As a general piece of advice, a higher credit score gets you a lower mortgage rate and bigger home buying budget. Credit scores in the “excellent” range (720+) have access to pretty much any loan program and better rates. So if it’s at all possible to improve your credit score before you apply for a mortgage and buy a home, it’s worth it to do so. See tips to improve your FICO score here.

What qualifies you as a first time buyer?

If you’re buying your first-ever home, you’re a “first-time home buyer” by default. But a repeat buyer can also qualify as a first-time home buyer, as long as they have not owned a home in the past three years. The three-year mark can help previous home buyers who have come on hard times get back into a home, with access to first-time buyer programs — like the Conventional 97 loan with 3% down — and some down payment assistance grants that are geared toward first time buyers.

What is the maximum income to qualify for first time home buyers?

Many popular first time home buyer programs have no income limit. For example, buyers can qualify for an FHA loan with 3.5% down, or a VA loan with zero down, at any income level. But some first-time home buyer programs do impose maximum income caps. To qualify for a zero-down USDA loan, your income can’t exceed 15% above the local median. Similarly, many down payment assistance grants set caps based on the local median income.

How do I get a first-time home buyer grant?

To get a first time home buyer grant, you’ll have to look into local programs. These grants are typically offered by state and local governments and nonprofits, so they vary by area. To qualify, you generally need to be a first-time home buyer with low-to-moderate income. And you need to make sure the mortgage program you’re applying for allows you to use the funds toward your down payment and/or closing costs. You can start by finding first time home buyer grants in your state, here.

How do I know if I’m ready to buy a house?

If you want to know whether you’re ready to buy a house, ask yourself four questions: 1) Do I have a steady job and reliable income?; 2) Do I have enough money saved for the down payment AND closing costs?; 3) Is my credit history reasonably strong?; 4) Do I plan to stay in the home for at least five years? There’s a lot more to each of these questions, of course, but the answers should give you a general feel for your home buying readiness. 

You can use these resources to help you find answers: 

First-time home buyer guide: Buying with a new job
The average down payment and when to put down more or less
Guide to mortgage closing costs
What credit score is required for a mortgage? 
The cost of homeownership vs. renting over 3, 5, and 10 years

What are the benefits of being a first time home buyer

First-time home buyers sometimes have access to special loan programs and home buying grants that other buyers don’t. However, these types of programs are often geared toward first time home buyers who need a little extra help; for instance, lower-income home buyers or those with poor credit. If you have great credit and make a lot of money, the benefits of being a first time home buyer might not apply to you — but then again, you might not need them.

How can I buy a house with no money down? 

There are two big loan programs that let you buy a house with no money down: the VA loan and the USDA loan. To qualify for a zero-down VA mortgage, you need to be a veteran or service member. For a USDA loan, you need to buy a house in a qualified “rural” area, and meet local income caps. For people who don’t qualify for these programs, it’s possible to buy a house with no money down by using gift funds or applying for down payment assistance.

Are there any fees when a home buyer works with a real estate agent?

No, real estate agents are “free” for home buyers; the seller typically pays their commission. Furthermore, because of conflicts of interest, there are almost no situations in which it makes sense for a home buyer to employ the same real estate agent as the home seller.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is an insurance policy which makes homeownership possible for home buyers who don’t want to make a twenty percent down payment. You, the borrower, pay PMI premiums to protect your mortgage lender from default and foreclosure.

Should you fail to repay your mortgage, the lender can “cash in” the homeowner’s PMI policy to recover its lost money. Conforming mortgage lenders require PMI when the home buyer makes a down payment of less than 20 percent.

PMI later self-cancels when the balance drops to 78 percent of the initial sales price. You can also apply with your servicer to remove it once the loan balance drops to 80 percent. (You may have to pay for an appraisal or refinance altogether to get this benefit).

What are points? How do I know if I should buy them or not?

A point is simply 1 percent of the loan amount. If you choose to “buy your rate down,” or pay “discount points,” you will get a lower interest rate.

All else being equal, the more you pay upfront, the lower your interest rate and monthly payment will be. But buying points might not pay off unless you keep your mortgage long enough to recoup your upfront costs with your monthly savings.

Deciding whether to pay points is a personal decision. Home buyers with plans to sell or refinance within a few years should usually not pay discount points. In for a 30-year fixed-rate mortgage, one discount point should reduce the rate by 0.125 to 0.25 percent.

For many home buyers, discount points are 100 percent tax-deductible in the year in which they are paid.

Check your eligibility today

The easiest way to find out if you’re eligible to buy a home right now is to check if you’re eligible for financing.

You can get started below. Getting verified by a lender is free, and it only takes a few minutes to begin.

Verify your new rate (Aug 14th, 2020)

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