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How to qualify as a first time home buyer for grants and loans

Erik J. Martin
The Mortgage Reports contributor

Being a first time home buyer has its perks

As a first-time home buyer, you’ll have access to special mortgage programs with low down payments and flexible guidelines.

You might even be in line for a grant to help with your down payment and closing costs.

But that all depends on what you qualify for.

Your eligibility for first time home buyer grants and loans depends on your credit score, income, down payment, and debts.

So do your research before buying to make sure you’re not missing out on first time home buyer programs that could save you money.

Verify your home buying eligibility (Jun 2nd, 2020)

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How to qualify for first-time home buyer loans

There are plenty of home loan programs that cater to first time buyers. And many of them have looser guidelines to accommodate those with lower credit, income, or down payments.

Here are the basic requirements to qualify for some of the most popular first time home buyer loans:

First Time Home Buyer Loan How to Qualify
FHA Loan 3.5% down payment, 580 FICO credit score minimum, 50% DTI (debt-to-income) ratio maximum. No income cap. 1-, 2-, 3- and 4-Unit properties are eligible
Conventional 97 Loan 3% down payment, 620-660 FICO credit score minimum, 43% DTI maximum, must be a single-family property. No income caps
Fannie Mae HomeReady Loan 3% down payment, 660 FICO credit score minimum, 45% DTI maximum, 97% LTV maximum, annual income can’t exceed 100% of median income for that area
Freddie Mac Home Possible Loan 3% down payment, 660 FICO credit score minimum, 45% DTI maximum, 97% LTV maximum, annual income can’t exceed 100% of median income for that area
VA Home Loan 0% down payment, 580-660 FICO credit score minimum, 41% DTI maximum, must be a veteran, active duty service member, or un-remarried spouse of KIA/MIA veteran
USDA Home Loan 640 FICO credit score minimum, 41% DTI maximum, annual income can’t exceed 115% of the US median income, must buy in eligible rural areas
FHA 203(k) Rehab Loan 3.5% down payment, 500-660 FICO credit score minimum, 45% DTI maximum, $5,000 minimum rehab costs

Know that not all the rules listed above are necessarily set in stone.

For example, you might be able to qualify for an FHA loan with a credit score as low as 500, as long as you can make a 10% down payment.

Or you might qualify for a Fannie Mae loan with a debt-to-income ratio as high as 50%, instead of 43%. But you’ll need other compensating factors (like a bigger savings account) to qualify.

So explore your loan options. Even if you have special circumstances, it’s likely easier to qualify as a first time home buyer than you think.

Verify your home buying eligibility (Jun 2nd, 2020)

How to qualify for first-time home buyer grants

As a first time home buyer, coming up with cash for the down payment and closing costs is one of the biggest hurdles. Luckily, there are grants and other programs available to help out.

“Every state in the country has a housing finance agency, and all offer special programs for first-time buyers,” says Anna DeSimone, author of Housing Finance 2020.

She continues, “Nearly every one of these agencies also has a down payment assistance program. These programs commonly offer grants to help fund your down payment—money that may not have to be repaid.

“Or, assistance can be in the form of a loan–the payments of which can be deferred until the house is sold or the mortgage is refinanced.”

>> Related: Down Payment Assistance programs in every state for 2020

DeSimone notes that agencies typically offer grants that equate to 4% of the home’s purchase price. “And many programs also provide additional assistance to cover closing costs.”

Of course, whether or not you qualify for a first time home buyer grant will depend on what’s available in your area.

Angel Merritt, mortgage manager with Zeal Credit Union, explains that each of these programs has different qualification requirements.

“Typically, you’d need a 640 minimum credit score. And income limits may be based on family size and property location,” says Merritt.

She notes that, in her state, a popular program is the Michigan State Housing Development Authority grant, which awards up to $7,500 in down payment assistance.

Who is considered a first time home buyer?

Anyone buying their very first home is automatically a “first-time buyer.”

But believe it or not, repeat buyers can sometimes qualify as first time home buyers too, letting them qualify special loan programs and financial assistance.

“Under most programs, a first-time home buyer is a person who has not had any ownership in the past three years.” –Ryan Leahy, Sales Manager at Mortgage Network, Inc.

“Under most programs, a first-time home buyer is a person who has not had any ownership in the past three years,” says Ryan Leahy, Sales Manager at Mortgage Network, Inc.

That’s especially good news for “boomerang buyers” who owned a home in the past but went through a short sale, foreclosure, or bankruptcy.

Under the three-year rule, these people have an easier road back to homeownership through first time home buyer grants and loans.

Verify your first time home buyer eligibility (Jun 2nd, 2020)

Advice for first time home buyers in today’s market

Suzanne Hollander is a real estate attorney and Florida International University senior instructor. She says, in general, first-time buyers also need to verify at least two years of income and current employment.

“What’s more, many lenders have been rapidly increasing the minimum credit score needed to qualify for many loans lately due to COVID-19 concerns,” says Hollander.

“This is happening because the initial lender sells a pool of FHA loans to investors on the secondary market. Investors buy these for an income stream, and they’re not interested in taking the risk on loans with lower credit scores during this time.”

Randall Yates, CEO of The Lenders Network, agrees.

“Some lenders who previously accepted a 580 credit score for an FHA loan have increased that minimum to 620 to 660,” notes Yates.

“If you have any credit issues, I’d recommend using all the extra time we have during this shutdown to get your credit in order.”

To improve your credit score, Hollander recommends these tips:

  • Call your credit card company and request an increase in your credit line
  • Keep your balance below 30% of your allowed credit limit
  • If you can’t pay a bill on time, call your credit card company and ask for a deferral of payments without a negative report to your credit agency

>> Related: Complete guide to building good credit

And remember — first time home buyer or not, you might find lenders willing to offer some flexibility with their guidelines.

So especially if you’re right on the edge of qualifying for a mortgage, make sure you shop around and ask plenty of questions before settling on a loan.

When applying for a home loan, don’t be afraid to ask questions about the qualification requirements, suggests Merritt.

“If your loan professional isn’t willing to explain everything, find another lender,” Merritt recommends.

Find out if you’re eligible as a first-time buyer

The best way to determine if you’re eligible for any grants or assistance is to reach out to the housing authority in the town or city where you want to purchase a home, advises Leahy.

Note that down payment grants and closing cost assistance isn’t widely advertised. You may have to do some digging on your own to locate resources available to you and for which you qualify.

When it comes to mortgage loans, things are a little easier.

You can find out what you qualify for — as well as your future interest rate and monthly payment — by simply shopping around online.

Verify your new rate (Jun 2nd, 2020)

Step by Step Guide

First-Time Home Buyer