10 min read
What is a First Time Home Buyer Mortgage & Do I Qualify?
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Buying a home, especially if you have never done it before, can seem like an uphill battle due to the many intricacies involved. As a first-time home buyer in Colorado, you might have many questions. Affordability may be one of the issues on your mind. Luckily, there are programs to ease your home ownership burden, first-time home buyer mortgages being one. This article explains what they are and the eligibility requirements you should meet to qualify.
Lesson Notes:
- A first-time home buyer is any individual who hasn't owned a home in the previous three years.
- There are various federal and local government incentives for first-time home buyer mortgages, such as lower down payments, down payment assistance, and IRS tax credits.
- Typically, first-time home buyer loans backed by Fannie Mae, Freddie Mac, and FHA programs have lower down payment requirements of 3%-3.5%. VA and USDA loans usually don’t have down payment requirements.
- Most first-time home buyer mortgages have requirements that better meet the needs of first-time buyers than conventional options.
LESSON CONTENTS
Who qualifies as a first-time home buyer?
A first-time home buyer is an individual who hasn't owned their primary residence for three years before the date of purchasing a new home. Therefore, you can be a first-time home buyer even though you previously owned a home. Also, individuals in the following circumstances qualify as first-time home buyers;
- An individual purchasing a primary residence who hasn’t had ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the property.
- An individual who is a displaced homemaker or single parent also will be considered a first-time homebuyer if they had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period.
First-time home buyer mortgage benefits
First-time home buyer home loans provide various benefits to ease your burden of home ownership. They include favorable terms and programs such as;
Reduced down payments
Unlike other standard mortgages, loans backed by the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the Department of Veterans Affairs (VA) have lower down payment requirements. First-time home buyers put down a deposit of 4% or lower. Some programs, such as USDA and VA loans, are even more beneficial, sometimes allowing zero down payments.
Rate discounts
The Federal Housing Finance Agency (FHFA) provides rate discounts for first-time buyer loans such as HomeReady, Home Possible, and HFA Advantage by reducing or eliminating upfront fees attributable to your credit score, DTI, and down payment amount.
Down payment and closing costs assistance
As a first-time home buyer in Colorado, you can apply for home-buying assistance programs from the local government. For example, Colorado Housing and Finance Authority (CHFA) provides down payment and closing costs assistance. They lend you up to 4% of your first-time home buyer mortgage with the option to defer repayment until you complete your original loan, refinance, or sell your home.
IRS tax credit
The Internal Revenue Service (IRS) may provide tax deductions to some homeowners. Speak with your financial advisor to see if you qualify.
What are the eligibility requirements?
So, what do you need to qualify for a first-time home buyer mortgage? The primary qualification is to have first-time home buyer status – meaning you have not owned a home in the prior three years. Still, there are other requirements you must meet in the following areas.
Credit score
Although first-time home buyer mortgages have more relaxed credit standards, your credit score is still a key consideration in qualification for your mortgage and the mortgage rate you will receive. Make sure you check your credit score before applying and address any issues.
Income and employment
Lenders require proof that you have a source of income. Therefore, they might request documents showing evidence of income, such as tax returns and paystubs. Also, they need a letter from your employer as proof of employment.
Debt-to-income (DTI) ratio
Your DTI is the ratio of your monthly debt payments to your gross monthly income. If your DTI exceeds the maximum limit, you might have to increase your income or pay off some debts before qualifying for a mortgage.
Funds for the down payment and closing costs
Lenders will need to document that you have enough funds to cover your down payment and closing costs. Ensure you have secured enough cash to settle both. Some mortgage loan programs that assist with down payments and closing costs may require you to complete a Home Buyer education class and earn a certificate of completion. Check with your lender if this is required for your loan program.
There are several types of home loans available to first-time home buyers. These loans are usually low or no down payment options with less stringent credit score, debt-to-income (DTI), and income limit requirements. (LTV). These are some of the options available to you. Please note, not all loan programs are available through every financial institution so speak with your lender to see what loan programs they offer.
Conventional 97
The Conventional 97 is backed by Fannie Mae and Freddie Mac and requires a 3% down payment, hence the term 97 in reference to the outstanding balance after the deposit. However, it requires private mortgage insurance (PMI), a minimum credit score and a maximum DTI.
Fannie Mae's HomeReady Mortgage
This subsidized option targeting low-to-moderate-income first-time home buyers is available through various US lenders. It provides benefits such as lower mortgage rates, reduced insurance premiums, and lower eligibility standards. HomeReady Mortgage requires the borrower to put up a 3% down payment and meet credit score and DTI requirements. However, your income must be at most 80% of the area median income to qualify.
Freddie Mac's Home Possible
Backed by Freddie Mac, this mortgage is similar to Fannie Mae's HomeReady in terms of requirements. The major difference is that it requires a higher credit score. Otherwise, the other eligibility criteria are the same.
FHA Mortgage
Another mortgage financing route for first-time home buyers is home loans from the Federal Housing Administration (FHA). A typical FHA mortgage loan has a higher minimum down payment of 3.5% compared to the 3% for Conventional 97, HomeReady, and Home Possible options. But other requirements like maximum DTI and minimum credit score are less stringent.
VA Mortgage
Department of Veterans Affairs mortgages are reserved exclusively for active military, surviving spouses, members of the National Guard, and retired veterans. VA loans are among the most affordable options since they have little to no down payment requirements and offer total purchase price financing with no mortgage insurance required. Also, they have no income limit. For financing, you will still need to meet DTI and credit score requirements.
USDA Mortgage
These are mortgage loans backed by the US Department of Agriculture. USDA loans allow zero down payment and provide discounted mortgage insurance. Although these loans have lighter standards, they are only available for eligible rural areas.
How to apply for a first-time home buyer mortgage
Before starting your mortgage application, ensure you have all the requisite documents. Your lender will need information regarding your credit history, income, proof of employment, bank statements, and debts. You will want to use a Mortgage Payment Calculator to see how much you can afford to spend on a home.
If you want to use a mortgage assistance program like CHFA, check to see whether you meet their qualifications. Note that these programs require attending an approved first-time home buyer class. You will also have to find a mortgage lender that works with your specific program.
Pre-qualification
First, you need to know how much your lender will loan you and the mortgage you qualify for. Your lender will examine your credit report, income, and debts and estimate the amount you can borrow.
Mortgage application and processing
Once you find a home and the seller accepts your offer, apply for first-time home buyer assistance - your lender can help, and submit your mortgage application to your lender.
During processing, the lender might seek additional clarification on your provided information. They will also conduct an appraisal to assess the value of the home you intend to buy and a title search to establish whether there are any existing liens on the property.
Loan approval
Once the mortgage underwriter is satisfied, your mortgage is approved, and you'll receive a commitment letter indicating the mortgage program, loan amount, interest rate, and loan term.
Closing
Now you are close to becoming a homeowner! Schedule with your loan officer to pay closing costs and sign any necessary documents.
First-time home buyer mortgages have different requirements. Thus, it is advisable to work with an experienced loan officer that will guide you on the best mortgage option. Ensure you take advantage of financial assistance programs that help with down payment and closing costs.
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