FIRST-TIME HOME BUYER

PRE-QUALIFICATION vs PRE-APPROVAL

A PRE-QUALIFICATION is an estimate of how much money a person can afford to spend on a property.

A PRE-APPROVAL means the lender has checked the potential buyer's credit and verified the documentation (the approval usually lasts for a particular period, such as 60 to 90 days).

REQUIREMENTS FOR PRE-APPROVAL

PROOF OF INCOME

Buyers provide W-2 wage statements from the previous two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses, and tax returns from the two most recent years.

EMPLOYMENT VERIFICATION

Lenders aim to ensure that they only lend to borrowers who have secure jobs. A lender will not only request pay stubs from a buyer but will also contact the employer to confirm employment and compensation. If a buyer just changed employment, a lender may wish to contact the old employer.

PROOF OF ASSETS

Bank statements and investment account statements are required to demonstrate that the borrower has funds for the down payment and closing costs, as well as cash reserves.

GOOD CREDIT SCORE

A FICO score of 620 or above is required by most lenders to accept a conventional loan, and some even demand that score for an FHA loan. Customers with credit scores of 760 or above often receive the lowest interest rates from lenders. According to FHA criteria, eligible applicants with a credit score of 580 or above can put down as little as 3.5 percent.

LOAN TYPES FOR FIRST-TIME HOMEBUYERS

Mortgages that are not insured or guaranteed by the federal government are referred to as conventional loans. They are usually fixed-rate loans. They are among the most difficult mortgages to qualify for due to their stringent requirements, which include a larger down payment, a higher credit score, lower debt-to-income (DTI) ratios, and the possibility of a private mortgage insurance (PMI) requirement. However, if you qualify for a traditional mortgage, they are frequently less expensive than federally insured loans.

01. CONVENTIONAL LOANS

The Federal Housing Administration (FHA), which is a branch of the U.S. Department of Housing and Urban Development (HUD) offers a variety of mortgage financing options. An FHA loan requires less down payment and is easier to qualify for than a conventional loan. FHA loans are ideal for first-time homebuyers because, in addition to lower upfront loan costs and less stringent credit requirements, you can put down as little as 3.5 percent.4 FHA loans cannot exceed the statutory limits described above.

02. FEDERAL HOUSING ADMINISTRATION
(FHA) LOAN

VA loans are guaranteed by the United States Department of Veterans Affairs (VA). The VA does not issue loans but rather guarantees those made by eligible lenders. These assurances make it possible for veterans to receive house loans with advantageous conditions (usually without a down payment). VA loans are typically simpler to qualify for than regular loans. Lenders typically limit the maximum VA loan to the limitations of conventional mortgage loans. You must first seek your eligibility from the VA before applying for a loan. If you are approved, the VA will offer you a certificate of eligibility to utilize when applying for a loan.

03. U.S. DEPARTMENT OF VETERANS
AFFAIRS (VA) LOANS

SPECIAL PROGRAMS
FOR FIRST-TIME HOMEBUYERS

ReadyBuyer

The Federal National Mortgage Association's (Fannie Mae) HomePath Ready Buyer program is designed for first-time buyers and offers up to 3% assistance toward closing costs when purchasing a Fannie Mae-owned foreclosed property. Before making an offer, potential buyers must complete a necessary home-buying education course to be eligible for the program.

Individual Retirement Accounts (IRAs)

Every first-time homebuyer is eligible to withdraw up to $10,000 from a traditional individual retirement account (IRA) without paying the 10% early withdrawal penalty. The maximum is per individual, so a couple might take up to $10,000 from their respective IRAs, for a total of $20,000 to put down. If a homebuyer wants to withdraw up to $10,000 from a Roth IRA for a home purchase, they can do so penalty-free if they've had the Roth account for at least five years. Please keep in mind that this only waives the penalty for early withdrawal. If you withdraw money from a conventional IRA, you must still pay income tax on the amount removed.

Downpayment Assistance Programs

For first-time buyers, several states provide down payment help programs. Eligibility varies by state, but these programs are primarily oriented at lower-income persons and public workers. Each state's programs are listed on the HUD website.