First-Time Homebuyer Requirements

Being a first-time homebuyer in any real estate market can be an adventure, equal parts thrills, and chills.

In the current market where inventory is historically low and interest rates have nearly doubled in a two-year period, buying a home might feel like hang gliding in a hurricane.

“With fewer homes coming on the market, we are still seeing homes go under contract the first weekend with multiple offers over asking price,” Brie Schmidt, owner and managing broker at Second City Real Estate in Chicago, said. “With current rates you can afford less than you did two years ago, yet in most markets home prices have risen.”

The S&P Corelogic Case-Shiller index backs that up with news that September 2023 home prices were up 3.9% over the previous September and only three of the 20 major cities surveyed showed a decline in home prices.

There are, however, benefits that go along with being a newbie in the housing market. First-time home buyers can qualify for special mortgages and other advantages that offer a path to ownership, but they must meet certain requirements.

“There are those who are overwhelmed by the intricate process of a home purchase,” Greg Solfanelli, Director of Marketing and Consumer Experience at Realty Network Group in Pennsylvania, said.

“Some of the most intimidated are first timers (who) have to be ready to make competitive offers at a moment’s notice. Luckily, there are several programs available that can provide assistance to make this journey a little easier.”

Programs providing assistance for first-time home buyers are as helpful as they are abundant. Also working to their general benefit? A loose definition of “first-time.”

What Is a First-Time Home Buyer?

Prior home ownership does not necessarily preclude you from first-time home buyer status.

If that sounds counter-intuitive, remember, these programs are designed to help people get into the market and facilitate what historically has been a proven step toward building wealth.

Most lenders extend first-time home buyer eligibility to those who haven’t owned property in the past 36 months. Depending on the lender and the program, other helpful circumstances are often taken into consideration.

“In some cases, individuals who are divorced may still be considered first-time homebuyers if they haven’t owned a home during or after the divorce,” Maureen McDermut of Sotheby’s International in Santa Barbara, said. “Likewise a displaced homemaker can also, in some cases, be considered a first-time home buyer.

“These would be circumstances where, for example, someone stayed home to care for children, even if listed as an owner of the home and then they end up in a divorce or their spouse is now deceased.”

It’s important to do your research. Ignorance is never bliss in the real estate market.

There are local, state, and federal programs aimed at helping first-time home buyers. While first-time home buyer status in a seller’s market can be challenging, the benefits include down payment assistance, loan options, grants, and vouchers – assistance unavailable to other buyers.

Requirements for First-Time Home Buyer Programs

 Just as there’s a plethora of first-time homebuyer programs, there is a plethora of qualifying requirements.

Eligibility guidelines differ from institution to institution and also differ depending on the type of loan or down payment assistance program.

“It is best to talk with a qualified lender in your state that is familiar with the various loan programs and any grant programs or assistance offered to first time home buyers,” Schmidt said.

“Your real estate agent and mortgage lender should be able to guide you on the various options and program restrictions. Programs can have different loan limits, grant repayment penalties, or specific requirements to occupy the property.”

First-time home buyer programs include the Federal Housing Finance Agency’s First-Time Home Buyer Mortgage Discount, Home Ready, Home Possible, Conventional 97, VA Mortgages and USDA Mortgages.

“Each state has programs in place to assist those who can qualify as first-time buyers,” Solfanelli said. “Moreover, there are local programs, such as NeighborWorks, who support buyers as they journey toward homeownership.”

In addition, there are other programs that aren’t specifically targeted to first-time home buyers but that can help with down payment assistance and lower mortgage rates for qualified customers.

First-time home buyer grants are awarded by federal, state, and local governments. Buyers might also qualify for grants from charitable organizations and housing foundations.

“Navigating all of this information can be overwhelming,” Omer Reiner, President of FL Cash Home Buyers in Fort Lauderdale, said. “When you choose a real estate agent, you should ask a prospective agent about first-time buyer programs and get a feel for how deep their knowledge about these programs runs.

“Don’t assume that every agent has the same knowledge or even the same desire to help you find the perfect program for you and your situation. It takes some investigating to find the agent that is right for you.”

Additional Lender Requirements

Requirements for mortgage loans vary depending on the type of loan and the institution offering it. An understanding of the basic requirements for home ownership is key for buyers whether or not they qualify for first-time status.

Those requirements apply to almost all buyers and include:

• Minimum down payments
• A work history with at least two years of steady employment
• Private mortgage insurance
• Minimum credit scores and maximum debt-to-income (DTI) ratios

Conventional loans require at least a 3% down payment. Loans with less than a 20% down payment require private mortgage insurance. Depending on your down payment (the bigger the better) and credit score (the higher the better), you could pay between 0.14% and 2.33% in private mortgage insurance as part of your monthly payment.

A minimum credit score of 620 is required for a conventional loan, less for FHA and VA loans. While lenders may make some allowances, a debt-to-income ratio higher than 43%-45% could disqualify you. DTI is your monthly debt payments divided by your gross monthly income. Some government-backed loans might allow a DTI near 50%.

“The minimum credit score or income requirement to get help as a first-time home buyer may vary depending on the specific programs or lenders,” Malcolm-Wiley Floyd, CEO of Stairs Financial in Brooklyn, said. “Some programs may have more flexible requirements, while others may have stricter criteria.

“First-time buyers need to research and explore different programs and lenders to find those that best match their financial situation and eligibility criteria.”

When Are You Considered a First-Time Home Buyer Again?

Many lenders – and the IRS – define a first-time home buyer as someone who hasn’t owned a principal resident for three years prior to the purchase of a home.

The status can also apply to people who have never owned a principal residence even if a spouse was a homeowner; a single parent who previously owned a home with a spouse; a displaced homemaker who only owned property with a spouse.

HUD’s definition even includes those who have experienced foreclosure.

“Furthermore, if you presently own a mobile home or have owned one within that three-year window, lenders will often grant you first-time buyer status since the rules for mobile-home ownership are unique,” Solfanelli said.

Key Recommendations for First-Time Home Buyers

Real estate professionals across the board commiserate with first-time home buyers on the challenges of the current real estate market and offer a number of helpful recommendations.

• Research various options: Look into government-backed loans, grants, and down payment assistance programs available federally and locally.
• Get pre-qualified for a loan: “This helps them understand their budget and strengthens their offer when competing with other buyers,” Floyd said.
• Mind your credit score: If real estate is location, location, location, as the saying goes, the key to qualifying for conventional loans is credit score, credit score, credit score. “Here’s the deal,” Dan Green, CEO of Cincinnati-based Homebuyers.com, said.  “For every 20 points your credit score goes up, your mortgage rate tends to drop by about 0.125 percentage points, at least until you hit a score of 780. After that, boosting your credit score won’t shave off more from your rate.”
• Pay down your credit cards: “If people are paying down student loan debt, they might be using credit cards to pay living expenses,” Reiner said. “Having high balances and missing payments can ruin the chance at buying your own home. It’s important to repair poor credit before seeking a loan and shopping for a house.”
• Make a budget and stick to it: When making a budget, Include not just the house payment you believe you can afford but the private mortgage insurance you might pay, annual taxes, emergency repairs, utilities, maintenance, and inflation. Money management is crucial in paying down debt and taking on a mortgage payment. It’s why financial advisors often recommend nonprofit credit counseling for budgeting help and debt management.
• Pay attention to your debt-to-income ratio: “For example, if you have a $600 a month car payment, that will lower your approval amount by almost $85,000,” Schmidt said. “So, if you have had the car for a few years, you may have enough savings to pay off the car loan and delay your timeline by a few months to get the higher approval.”

Resources and Assistance

Realtors and mortgage brokers should be your first resource in understanding the options and programs available to first-time home buyers.

They not only are versed in the state and local programs targeted to first-time home buyers, but they can also point you to the education programs/seminars available locally. Most major cities have education programs through their housing authorities.

“Local housing counseling agencies often offer courses that provide in-depth information on homeownership and available assistance programs,” Wiley said.

Websites such as HUD.gov, Fannie Mae (HomePath Ready Buyer) and Freddie Mac (HomeOne and Home Possible) provide information on various homebuyer programs and resources.

Homebuyer.com, Green’s company, has a YouTube channel that includes a playlist dedicated to first-time home buyer programs and grants.

Green also suggests first-time homebuyers inquire about mortgage rate benefits available through the FHFA First-Time Home Buyer Discount.

“These automatic discounts, applicable for low- and moderate-income buyers, can potentially reduce rates by up to 1.75 percentage points,” he said. “It’s worth noting that this program is temporary, so it is best to seize the opportunity sooner rather than later.”

Websites such as Realtor.com, Investopedia.com and MortgageReports.com can help first-time home buyers navigate what can be an overwhelming process.

“Do your homework and shop around for the best interest rates and programs to suit your needs,” Solfanelli said. “Don’t immediately settle on the first lender you encounter.”

Solfanelli sees the real estate market benefits trending (if slowly) toward buyers.

“The day when buyers can pay market value for a home without constant interference from other buyers or pay below market value in efforts to get a deal will become a reality once again,” he said. “A time when buyers won’t feel rushed into making hasty decisions about homeownership is on the horizon.”