First-time home buyers tend to have a lot of questions about the mortgage approval process. One of the most common questions we get from our readers is: What are the steps in qualifying for a home loan as a first-time buyer? And what are the minimum qualification requirements for getting a first mortgage loan? Here’s what you need to know.
Mortgage lenders look at a variety of factors when considering loan applications. Income, credit scores, debt ratios, and down payment funds are some of the most important factors for first-time buyers qualifying for a home loan. So let’s talk about each one.
Credit scores are three-digit numbers that basically show how you have borrowed and repaid money in the past. They are computed automatically by sophisticated algorithms that use information found within a person’s credit reports. The FIFO credit scoring model is the one most commonly used by mortgage lenders. So it’s generally the one that matters most, when it comes to qualifying for a home loan as a first-time buyer.
Minimum credit-score requirements can vary from one mortgage program to the next. The FHA loan program is one of the most lenient, in terms of credit standards. First-time home buyers who use an FHA loan must have a credit score of at least 580, if they wish to use the 3.5% down payment option.
Conventional home loans (which are not insured or guaranteed by the government) typically have higher credit score requirements. To qualify for a conventional loan, first-time home buyers might need a credit score of 600 or higher. That number is not necessarily written in stone, but it does signify a common cutoff point used by mortgage lenders. Some set the bar even higher at around 620. It can vary.
Credit scores are one of the most important qualification requirements for a home loan
The bottom line is that a higher credit score will help you when qualifying for a home loan as a first-time buyer. It could also help you secure a lower mortgage rate, which could save you money over time.
Your income level will also affect your ability to qualify for a mortgage loan as a first-time buyer. This is true for repeat buyers as well.
Household debt is another important qualification requirement for first-time home buyers seeking a mortgage loan. Mortgage lenders will review your current debts to ensure that you are not taking on too much additional debt with the acquisition of home loan.
To do this, they look at something known as the debt-to-income ratio, or DTI. This is basically a comparison between the amount of money you earn and the amount you spend on your recurring debts.
Here again, there is no single threshold that applies across the entire mortgage industry. A lot of lenders today set the bar somewhere around 40% to 43%, in terms of total debt-to-income ratio. Borrowers who have compensating factors might be allowed to have a total DTI as high as 50%. It varies.
The bottom line here is that if your combined monthly debts “soak up” more than 50% of your income, you might have trouble qualifying for a home loan as a first-time buyer.
Be prepared to provide these and other financial documents when qualifying for a home loan
We just talked about how mortgage lenders will verify income and debt levels. They do this by looking at your tax records for the last couple of years, bank statements, pay stubs, and more.
Down payments are another important requirement for first-time buyers. Unless you use a government-backed program, such as a VA or USDA loan, you will probably have to make a down payment of some kind.
The minimum down-payment requirement for qualifying for a home loan can vary, depending on the type of mortgage being used. Conventional loans can require as little as 3% down in some cases, though some lenders might require 5%. The FHA mortgage loan program allows for a down payment of 3.5% of the purchase price or appraised value.
The good news is that first-time home buyers can obtain down payment funds from a third-party, such as a family member or close friend. Most mortgage programs allow for down payment gifts, which is money given by a third party to the borrower who is actually buying the home.
The important caveat is that the money must truly be a gift, and not an interpersonal law. In fact, the person providing the funds will have to provide a gift letter as well, which must state that they do not expect any kind of repayment.
So those are some of the important considerations when qualifying for a home loan as a first-time buyer. Generally speaking, borrowers seeking a mortgage loan need Michigan interest rate for unsecured personal loan a decent credit score, a manageable level of debt, and in many cases a down payment.