First-Time Home Buyer Guide 2023: Grants, Programs, and Frequently Asked Questions

Purchasing Your First House Begins Here

Purchasing a home is a complex endeavor, particularly for first-time buyers. However, if you know what to anticipate, it need not be unpleasant or perplexing. This guide for first-time homebuyers will help you determine how much house you can afford and how to finance it, the first two stages in purchasing a home.

Guide for First-Time Homebuyers: Key Takeaways

As a first-time buyer, no one expects you to be an expert on home buying. However, there are several advantages to knowing even a little. You will be better off and less anxious the more you know. You may receive a better rate on your new mortgage.

Here are a few crucial considerations to bear in mind if you are starting:

• Contact at least three mortgage lenders to guarantee you receive the lowest rate. Many first-time homebuyers make the mistake of selecting the first lender they speak with, so forfeiting thousands of dollars in potential savings.
• Discover the many forms of house loans. Although numerous loan kinds exist, more than 90 percent of purchasers will use one of four primary loan programs: conventional, FHA, VA, or USDA. Determine which loan best meets your requirements. There are choices for modest down payments, low credit scores, self-employed borrowers, and high loan amounts, among others.
• Determine your budget and monthly payment. Include principle, interest, taxes, and insurance when computing your mortgage payment. Understand both your budget and your mortgage rate. This will enable you to browse confidently for a property and mortgage.
• Obtain preapproval for a mortgage before property hunting. Preapproval from a lender certifies your ability to purchase a house, and many sellers will only accept an offer with a preapproval letter.

If you keep these four factors in mind, you can maximize your home-buying budget and secure the best mortgage arrangement for your new residence.

What Is a Mortgage?

A small minority of homebuyers pay in full with cash. Everyone else must borrow at least a portion of their house purchase funds. This is accomplished via a loan known as a “mortgage.”

What distinguishes a mortgage from other forms of loans?

• Low-interest rates: 6% to 8% yearly at the time this article was written.
• The majority of homeowners pay off their mortgages over 30 years.
• Rates and payments are often fixed: Most borrowers obtain a fixed-rate mortgage that “fixes” their home loan’s interest rate, ensuring that their monthly payment remains constant for the duration of the loan. However, loans with variable rates are also accessible.
• The loan is “secured” since mortgages are backed by the value of the borrower’s house. To recuperate losses, the mortgage company may reclaim (foreclose) your home if you default on payments.

In certain instances, a mortgage loan can pay the full purchase price of a property. However, the majority of individuals contribute their funds to the purchase. The amount paid out of pocket is known as the “down payment,” and the mortgage covers the purchase price balance.

For instance, if you contribute $25,000 of your own money toward the purchase of a $250,000 property, you have paid a 10% down payment. The remainder, $225,000, is funded by the mortgage loan.

Mortgage Rates for First Time Home Buyers

First-time homebuyers do not receive reduced mortgage rates just because they are entering the market for the first time. The average current rate for first-time homebuyers is 5.82% (5.846% APR).

Your interest rate as a first-time buyer is decided by the same elements as everyone else’s:

• Your credit rating
• Your loan variety
• Your initial payment sum
• The whole market for interest rates

As a mortgage borrower, you should seek the lowest feasible interest rate. This will keep your mortgage payments modest and decrease the interest you pay throughout the life of the loan.

One way to reduce your interest rate is to improve your finances before purchasing. A larger down payment or an increase in credit score, even by a few points, can significantly impact your mortgage rate.

Before deciding on a loan, it is also essential to compare several lenders’ terms. Each lender uniquely calculates its rates. Some may offer cheaper rates for FHA loans or customers with less-than-perfect credit, for instance. By comparing many mortgage lenders, you may select the most accommodating to your circumstances and offer the best house loan terms.

First-Time Buyer Mortgage Lending Programs

Homebuyers today have access to hundreds of lending options. However, more than 90 percent of purchasers (including first-time homebuyers) will utilize one of four popular financing schemes.

These include:

• Conventional mortgage
• The government insures the Federal Housing Administration (FHA) housing loan.
• The Department of Veterans Affairs (V.A.) home loan is available to veterans.
• The United States Department of Agriculture (USDA) offers house loans.

Popularity is attributable to these programs’ availability, low rates, accommodating terms, and relative cost. Each offers distinct advantages based on your needs as a first-time homebuyer (lower down payment, lower credit threshold, lower-income options, etc.)

Your loan officer will assist you in selecting the most suitable mortgage for your circumstances. But you should be aware of your alternatives before asking the right questions.

Here is a summary of each sort of loan:

Standard Loans: 3% Down Payment

Most homebuyers envision conventional conforming mortgage loans when they think about house loans. Conforming loans adhere to the Fannie Mae and Freddie Mac criteria. Conforming mortgages are frequently the best choice for house purchasers with strong credit ratings and a down payment of at least 10%.

However, there are several conforming mortgage choices for purchasers with a 3% down payment. These consist of

• HomeReady loans by Fannie Mae
• HomePossible is Freddie Mac’s home financing program.
• Conventional 97 mortgage loan

HomeReady and HomePossible mortgages provide modest down payments (beginning at 3 percent) and flexible qualifying requirements, particularly for low-income homebuyers. In addition, their private mortgage insurance (PMI) rates are cut.

Conventional 97 mortgages provide no such savings but can be the cheapest method to purchase a house with minimal money down (just 3%) – especially for buyers with extra-good credit.

FHA Loans Need a 3.5% Down Payment

FHA loans are popular with customers with smaller down payments or credit difficulties, requiring more underwriting flexibility. The greatest benefit of this loan is that purchasers with subpar credit can be accepted for a mortgage.

FHA loans are available to borrowers with credit scores as low as 580 with a 3.5% down payment and 500 with a 10% down payment. However, low credit ratings cannot arise from a recent poor credit history.

Typically, FHA mortgage rates are lower than conventional mortgage rates. Due to the requirement for mortgage insurance premiums (MIP) on all FHA loans, the overall cost of an FHA loan is sometimes greater.

FHA mortgage insurance costs:

• The upfront mortgage insurance premium (UFMIP) for recent FHA loans and refinances is 1.75 percent of the loan amount.
• Annual Mortgage Insurance Premium (MIP): 0.85% of the loan balance for the vast majority of FHA loans and refinances

FHA mortgage insurance must be maintained during the duration of the loan. However, borrowers can refinance into a new loan type in the future to eliminate these surcharges.

Moreover, the property you purchase with an FHA loan must be your principal residence. This loan cannot be used to acquire a second home or investment property. This also applies to government-backed credit schemes, such as V.A. and USDA mortgages.

VA Loans: Zero Percent Down Payment

The VA loan is a great program that offers perks that no other loan does. To be qualified, you must be affiliated with the military. V.A. loans provide: 

• 100% funding.
• Streamlined loan approval criteria.
• The lowest mortgage rates are accessible to veterans and active-duty military personnel.

Moreover, VA loan rates typically surpass all other major loan kinds. Typically, VA mortgage rates are 40 basis points (0.40%) cheaper than equivalent conventional loan rates. If you qualify, the V.A. loan is hard to match in terms of mortgage affordability.

USDA Loans: No Money Down

Available in low-density suburbs and in rural areas, the USDA loan is another option for financing a home with no down payment. It provides borrowers with low to moderate incomes with reduced mortgage rates, no down payment, and cheaper mortgage insurance.

The only drawback? The residence must be located in a designated rural region, per USDA requirements. That typically implies it has to be located in a city with fewer than 20,000.

How Much Do I Need for a Down Payment on a House?

Many first-time homebuyers assume a 20% down payment is required. But that is not the case. The typical down payment for first-time homebuyers is around 13 percent. On a purchase of a home for $250,000, this would amount to $32,500. And lending options allow you to buy with an even lower down payment. For instance:

• FHA loans: 3.5% down payment
• V.A. loans: no money down
• USDA loans: no money down
• Conventional 97 loans need a 3% down payment.

The most important point is that down payments are adaptable. Yours should rely on your monthly income, your current savings, the cost of the home, and your overall home-buying objectives.

The advantages and disadvantages of larger vs. lesser down payments are as follows:

• Bigger down payment: lower monthly payment and lower interest rate 
• With a smaller down payment, you may buy a home and begin building equity sooner while keeping more of your emergency funds intact.

Take a look at your finances and home-purchasing aspirations to find the correct down payment.

Why Is It Suggest Do Have a 20% Down Payment

The average down payment is much below 20%. You may question why so many individuals believe a 20% down payment is the minimum because a 20% down payment exempts you from paying private mortgage insurance on a conventional loan, the most prevalent kind of mortgage loan.

Mortgage insurance is often a few hundred dollars each month in addition to your monthly mortgage payment. Most purchasers would want to avoid paying for mortgage insurance, which is reasonable. Thus, some individuals strive for a 20% down payment.

However, there are advantages to paying mortgage insurance if it expedites house ownership. As you prepare a budget for purchasing a property, you must evaluate the expense vs. the value of this factor.

Options for Down Payment Assistance

Most mortgage programs need a down payment, regardless of their size. Theoretically, this is money you contributed from your pocket to the home’s purchase price. However, you may make a needed down payment without depleting your resources.

Local down payment and closing cost assistance programs are one option. Typically administered by local governments, down payment assistance programs give grants and low-interest loans to help purchasers afford their down payment and initial house purchase costs.

You can also utilize gifts for a mortgage down payment. To use a financial gift as a down payment, you must confirm the money originated from an “approved source.” This involves establishing a paper trail indicating the gift funds were transferred from the donor’s account to yours or escrow.

There is no maximum amount that can be gifted to a homebuyer.

Minimum Credit Score for Home Purchase

Some first-time homebuyers believe excellent credit is required to purchase a home, although mortgage choices are frequently available to individuals with average or even poor credit.

Most lending programs have minimum credit score criteria of 620; however, the FHA loan program allows borrowers with a 580 FICO score to get a mortgage.

1. 620 for a conventional loan
2. FHA loan: 580
3. VA loan: 620
4. USDA loan: 640

Not only does your credit score important, but so does your credit report. Lenders want to see that you’ve made all your loan payments on schedule and that you don’t have any recent credit troubles, such as bankruptcy or foreclosure.

What Is an Acceptable Credit Score for a Mortgage?

Those with “excellent” credit often have access to the most advantageous lending programs and the lowest interest rates.

For reference, credit ratings are often categorized as follows:

• Excellent: 720 or more
• Good: 680 to 719
• Suitable: 620 to 679
• Poor: 619 or less

It gets more difficult to obtain home financing with a credit score below 620.

Technically, FHA loans are accessible to borrowers with credit scores as low as 500, but only if they can make at least a 10% down payment, and it can be difficult to find lenders willing to be that accommodating.

Similarly, VA loans have no minimum credit score requirement by default; however, most lenders enforce a minimum credit score of 620 for V.A. loans.

Start checking your credit history before you buy a house — at least a year in advance, if possible. This will give you time to identify errors on your report, fix them, and even raise your score if you need to qualify for a loan. If you can, pay down your credit card balances, which will also help increase your score.

Grants for First-Time Homebuyers

State and municipal governments frequently provide grants for first-time homebuyers through down payment assistance (DPA) programs that can cover all or a portion of your down payment and closing fees.

One research found that first-time homebuyers who utilized down payment help saved around $6,000 at closing and an additional $11,000 over the life of their loans.

Typically, down payment aid takes one of two forms:

• A first-time home buyer grant is money you do not have to repay.
• A low-interest loan is money obtained to finance your down payment or closing costs with minimal interest that you must repay.

Grants for first-time homebuyers vary in amount and availability based on where you reside, and eligibility conditions change depending on the program you select.

The U.S. Department of Housing and Urban Development (HUD) provides a database of first-time homebuyer loan programs by state. For additional information, check our comprehensive reference to grants and loans for first-time homebuyers in your area.

What Size Home Can I Afford?

Once you’ve determined the sort of mortgage loan that best suits your needs, you’ll want to consider your monthly budget and how much home you can afford.

Let’s assume you’re looking for a mortgage payment of $1,400 per month; we’ll now work backward to estimate the highest home purchase price you can afford.

Determine the Monthly Mortgage Payment (PITI)

Your monthly mortgage payment consists of four components, known together as PITI: principal, interest, taxes, and insurance.

• Principal and Interest: Principal and Interest comprise the bulk of your monthly mortgage payment, which includes principal reduction and interest paid to the lender.
• As a homeowner, you are responsible for paying annual property taxes to the local taxing body. Typically, property taxes run from 1% to 2% of your home’s value yearly.
• Mortgage lenders need homeowners insurance, which usually costs between 0.25 and 0.50 percent of the home’s yearly value.

For this example, we will assume that you will not include HOA dues in your monthly housing budget, as other areas have monthly HOA fees.

Assuming a house purchase price of $250,000 and a 10% down payment, you should set aside $300 monthly for taxes and insurance, leaving around $1,100 for principle and interest.

Determine Your Mortgage Rate and Price Range

Whether a property is “affordable” also depends on your mortgage rates. Remember that mortgage rates fluctuate daily and can change by 50 basis points over weeks and months.

It is crucial to monitor mortgage rates and trends when looking for a home, especially over a prolonged period.

Consider the previous scenario, in which you have allocated $1,400 each month for principle and interest.

• The property is within budget, with a monthly of $1,349 and mortgage rates of 6%.
• The property may be unaffordable, with a mortgage payment of $1,497 and interest rates of 7%.

This example illustrates why you should never base your house search on a price range. The same home is reasonable while mortgage rates are low, but unaffordable when rates rise. The only way to stay within your budget is to adjust your goal price range depending on current mortgage rates.

Deciding the Best Lender

One of the first-time homebuyers’ biggest mistakes is not shopping around for a mortgage. They may get prequalified with the bank they use for their checking and savings accounts, or they may get a quote and go with the first lender they speak with, assuming that rates and prices are the same everywhere.

In reality, lenders have considerable leeway in determining the rates they provide.

For a single consumer, mortgage rates might vary by as much as 0.5% from one lender to the next. This difference may seem insignificant, but during the first three years of a $250,000 loan, it would save you about $4,000.

Additionally, some lenders may offer reduced closing charges but higher interest rates. Feel free to negotiate prices such as underwriting or loan origination fees; doing so might save you several hundred dollars.

Before committing to a home loan, be careful to compare rates and fees from many lenders. Alternatively, some homebuyers choose to engage with a mortgage broker who may provide loan programs at once.

FAQs for First-Time Homebuyers

Which Programs Exist for First-Time Homebuyers?

First-time homebuyers can utilize any current mortgage programs if they qualify financially. First-time homebuyers may also have access to special loans, scholarships, and home buyer courses that give discounts on down payments and closing expenses, depending on where they reside.

What Credit Score Is Required for a First-Time Home Purchase?

Most loan programs require a credit score of 620 or higher to purchase a home for the first time. This includes conventional loans, most V.A. loans, and USDA loans (which require 640+). Home buyers with lower credit may qualify for an FHA loan with a score as low as 580 and a 3.5% down payment.

Who Is Considered a First-Time Buyer?

A repeat buyer can qualify as a first-time home buyer if they have not owned a home in the past three years. This helps previous home buyers who have fallen on hard times get back into a home.

What Is the Maximum Income for First-Time Homebuyers to Qualify?

However, some first-time home buyer programs do impose maximum income caps. For example, your income cannot exceed 15 percent above the local median to qualify for a zero-down USDA loan.

How Can I Obtain a Grant for First-Time Homebuyers?

To get a first-time home buyer grant, you’ll need to look for programs in your area. These grants are typically offered by state and local governments and nonprofits, so they vary by location.

How Can I Know Whether I Am Prepared to Purchase a Home?

Ask yourself the following four questions to determine if you’re ready to buy a home: 1) Do I have a steady job and reliable income? 2) Do I have enough money saved for the down payment and closing costs? 3) Is my credit history reasonably strong? 4) Do I plan to stay in the home for at least five years? If you answered “yes” to all of these questions, you’re probably ready to get pre-approved for a loan and start looking for your dream home.

What Are the Advantages of Purchasing a Home for the First Time?

First-time home buyers sometimes have access to special loan programs and home-buying grants that other buyers do not. However, these programs are often geared toward first-time home buyers who need extra help, such as those with low income or poor credit.

How Can I Purchase a Home With No Down Payment?

Two main loan programs allow you to buy a house with no down payment: the V.A. loan and the USDA loan. To qualify for a zero-down V.A. mortgage, you must be a veteran or service member. For a USDA loan, you must purchase a home in a rural area and meet local income limits.

Are There Any Costs Associated With Working With a Real Estate Agent?

No, real estate agents are free for homebuyers; the seller normally pays their commission. Moreover, due to potential conflicts of interest, it is virtually never advisable for a homebuyer to choose the same real estate agent as the home seller.

What Is PMI and Do I Need It?

Private Mortgage Insurance (PMI) is an insurance policy that allows homebuyers to avoid making a 20 percent down payment. The borrower pays PMI premiums to protect the lender from default and foreclosure.

What Are Points, and How Do I Decide Whether to Purchase Them?

A point or discount point is an additional fee you pay ahead to reduce your mortgage interest rate. One point normally costs 1 percent of the loan amount or $1,000 for every $100,000 borrowed.

Should I Conduct a House Inspection?

A home inspection may be optional if you use a conventional loan backed by Fannie Mae or Freddie Mac. However, home inspections are required on government-backed loans like FHA and V.A. Experts recommend a home inspector walk-through regardless of whether it’s needed. The inspector could find structural or systemic problems you’d want to know about before buying the home.

Check Your Eligibility to Purchase a House Today.

Checking if you’re qualified for financing is the simplest method to determine if you can purchase a house right now. You can get started by clicking the button below; it’s quick, free, and only takes a few minutes.