How to qualify for a home loan as a first-time buyer?

A lot of the work needed to buy a first home happens at the beginning of the buying process.

Saving a down payment, building a solid credit history, and finding the right loan program – these tasks can seem insurmountable to many home shoppers even before they start looking for the right home at the right price. It can feel like pushing a boulder up a never-ending hill.

The key to qualifying for a home loan as a first-time buyer? Finding the fastest and most affordable way to tackle these jobs. Often, loan programs designed for first-time homebuyers can help.

First: What makes you a first-time homebuyer?

Naturally, if you've never owned your own home and you're buying a primary residence, you're a first-time homebuyer.

But you may be a first-time buyer even if you've owned a home before, depending on:

The three-year rule

Home shoppers who haven't owned a home in the past three years can qualify for most first-time homebuyer loans and support programs. 

The three-year clock starts ticking the day you sold or lost ownership of your last home. 

The primary residence rule

If you've inherited a rental house, or invested in rental property on your own or as part of a group, but never owned your own primary residence, you can still apply for a mortgage as a first-time buyer. 

The single-parent rule

A single parent who previously owned a home with a former spouse can qualify as a first-time buyer, even if the marriage ended within the past three years.

This rule acknowledges that divorce makes holding onto a home more difficult, especially for single parents. Some programs allow divorced homemakers to get first-time homebuyer loans even when the borrower is not a single parent.

Ready to see your loan options and home price range? Start with a preapproval from Better.

...in as little as 3 minutes – no credit impact

First-time homebuyer qualification requirements

Meeting the definition of a first-time homebuyer doesn't guarantee eligibility for any loan program.

First-time buyer programs make qualifying simpler and easier, but the borrower still has to qualify with the mortgage lender.

This means:

Meeting credit score requirements by loan type

Your credit score directly impacts which loan programs will accept your application:

– FHA loans: FICO score of 580 for borrowers making 3.5% down
– Conventional loans: Typically require 620 or higher
– VA loans: No official minimum, though most mortgage lenders prefer 620 or higher
– USDA loans: Generally require 640 or higher

Covering the loan's minimum down payment

Down payment requirements create significant differences between loan programs:

– FHA loans: 3.5% minimum with qualifying credit scores
– Conventional first-time buyer programs: Many offer 3% down options, but higher credit scores may be needed to qualify
– VA and USDA loans: Zero down payment for borrowers who are eligible to apply

Falling within debt-to-income ratio (DTI) limits

Lenders measure your debt to make sure you can afford to repay the loan. They measure monthly debt as a percentage of your gross monthly income.

Many first-time buyers can qualify when 43 percent of their monthly income goes toward debt. This debt includes the new house payment. It's possible to qualify even when debt-to-income ratio (DTI) is up to 50 percent. To compensate for the higher DTI, the lender may want the borrower to have a healthy savings account or a high income. 

Verifying stable income and employment status

To approve a mortgage loan, a lender also has to know the source of the borrower's monthly income. This means checking W2s, pay stubs, bank statements, and, sometimes, income tax returns. 

First-time buyers should be able to show they've earned a stable income for at least two years. Someone who's new to a profession may be able to get around this rule by writing a letter of explanation.

...in as little as 3 minutes – no credit impact

First-time buyer programs can help

First-time buyers who don't have enough money to make their down payment or pay closing costs should look into homebuyer programs that can help.

Down payment and closing cost assistance

Some state and local government programs help first-time buyers cover their upfront homebuying costs.

These programs vary by location. Generally, buyers with moderate to low income qualify for the most help.

These programs offer either:

– Loans: Loans to cover down payments and closing costs often require no monthly payments as long as the buyer keeps living in the home. Many are gradually forgiven as time passes.
– Grants: Some programs offer grants, which require no repayment.
Buyers should let their lenders know if they're planning to use a DPA program. These programs may limit which loans the borrower can use.

Nonprofit programs

Organizations like Habitat for Humanity create affordable homeownership opportunities through sweat equity requirements and below-market financing. These programs often combine reduced home prices with education and ongoing support.

Employer-sponsored programs

Companies in high-cost areas may offer homebuying benefits to attract and retain employees. Some employers match buyer down payment funds or offer special deals through local credit unions. 

Help from family and friends

First-time buyers can ask their family and friends to help cover upfront costs. Rather than wedding or graduation presents, buyers can ask for down payment cash. Or, buyers can ask for an early inheritance.  

First-generation homebuyer help

Some programs help borrowers whose parents never owned homes, recognizing that generational wealth gaps create barriers. These initiatives often provide extra education, coaching, and financial assistance beyond standard first-time buyer programs.

Government-backed loan options

Though open to repeat homebuyers as well as first-time buyers, government-insured loans help renters become homeowners:

– FHA loans help buyers with credit challenges, requiring just 3.5 percent down even with credit scores as low as 580.
– VA loans provide unmatched benefits, but only for military service members and veterans. VA loans require no down payment, no monthly mortgage insurance premiums, and competitive interest rates.
– USDA loans serve buyers with moderate incomes in rural and some suburban areas. USDA Guaranteed loans require no money down.

Special conventional loan programs

Conventional loans, those regulated by Fannie Mae and Freddie Mac, include loan programs designed specifically for first-time buyers.

HomeReady and Home Possible loans can approve buyers with down payments as low as 3 percent. These loans can make special allowances for qualifying income. For example, a borrower may be able to include income earned from a boarder or from a co-borrower who won't live in the home.

These programs compete directly with FHA loans but often provide lower mortgage insurance costs.

First-time buyer home loans

There's no single mortgage loan that works best for all first-time buyers, but most loan programs offer benefits that help first-time buyers. Borrowers should find a loan whose strengths match their needs.

FHA loans for first-time buyers

A first-time mortgage borrower with average credit who needs to make a low down payment should consider an FHA loan. The government insurance built into these loans helps first-time buyers overcome credit, income, and down payment challenges. FHA loans require only 3.5 percent down, even when borrowers have FICO credit scores as low as 580.

Some lenders will go below the 580 credit score mark if the buyer can put 10 percent down.

Conventional loans with first-time buyer features

First-time buyers with higher credit scores can benefit from conventional loans with built-in features for first-time buyers.

Down payments on these loans can go as low as 3 percent. Other benefits for first-time buyers include flexible income and co-signing rules.

VA loans and USDA loans with zero down

Not all homebuyers can use VA and USDA loans.

– To use a USDA loan, a first-time buyer must find a home in a USDA-designated rural area and earn moderate income, defined as 120 percent of the area's median income.
– To use a VA loan, the borrower must be on active military duty, a veteran of the military, or the surviving spouse of a veteran who died in the line of duty.

But borrowers who are eligible for USDA and VA loans can buy with no money down. This is a powerful benefit. VA loans, for example, require no money down and no monthly mortgage insurance premiums but can still deliver competitive interest rates.

State Housing Finance Agency (HFA) loans

State Housing Finance Agencies (HFAs) initiate FHA or conventional loans for first-time buyers, often combining the primary mortgage loan with local down payment assistance loans. These programs usually require Homebuyer Education courses.

How to qualify for a first-time home loan

First-time home loan shoppers can position themselves for success by: 

Checking and repairing credit scores

Borrowers with higher credit scores, on average, have more loan choices. More choices can lead to lower monthly payments and lower long-term costs. 

Many mortgage lenders help first-time buyers improve their credit scores, but credit repair isn't always fast. Be sure to start working on credit before applying for a mortgage.

Generally, credit scores improve when borrowers make all their debt payments on time and keep their credit card balances as low as possible, ideally below 30 percent of the credit limit.

Home shoppers can also check their credit reports from the three major credit bureaus at annualcreditreport.com. Look for mistakes, such as credit accounts that aren't yours.  

Planning for upfront costs

Everybody knows about the down payment, which can range from 3 to 10 percent or higher for first-time buyers. Buyers should also plan for closing costs, which typically range from 3 to 6 percent of the loan amount. 

For a $300,000 loan, closing costs could range from $9,000 to $18,000.

The home seller can help pay closing costs, but it's the buyer's responsibility to make these arrangements when entering the purchase contract.

Buyers should also set aside money for moving costs as well as unexpected expenses. Buyers with healthy savings account balances may qualify for more loan types and potentially lower interest rates.

Finding the right loan and lender

Most experts advise shopping around with multiple lenders to compare rates, fees, and benefits. Credit unions, neighborhood banks, and online lenders each bring their own advantages.

Most lenders offer programs to help first-time buyers get approved. Online lenders tend to be faster and more affordable since they rely more on technology and since they specialize in mortgage loans. 

Buyers should get pre-approved for a mortgage loan before they start house hunting. Preapproval shows the ballpark purchase price a borrower could afford. Preapproval also shows home sellers and listing agents that the buyer is serious about making an offer.

Better's pre-approval process uses AI and can show results in as few as three minutes.

FAQs about how to qualify for a first-time home purchase

What credit score do I need to qualify as a first-time homebuyer?

Minimum credit scores vary by loan type. For first-time buyers with credit challenges, the FHA loan program is usually a good fit. Borrowers with credit scores as low as 580 can still buy with only 3.5 percent down. Most other loans require credit scores of at least 620, and conventional borrowers with scores of 620 often need larger down payments to qualify.

How much do I need for a down payment as a first-time buyer?

Some first-time buyers can put nothing down and still get mortgage approved, but most buyers need at least 3.5 percent down. USDA and VA loans require no money down. FHA loans require at least 3.5 percent down. 

Can I be considered a first-time homebuyer if I've owned property before?

Yes, you can still qualify as a first-time homebuyer even if you've owned property before. If you haven't owned a primary residence in the last three years, for example, you're likely eligible for first-time buyer programs.

Are there special programs to help with down payments and closing costs?

Yes. Many state and local governments offer down payment assistance and closing cost help. Also, some employers and nonprofits help first-time buyers pay upfront costs.

What's the maximum debt-to-income ratio allowed for first-time homebuyers?

Many lenders prefer a debt-to-income (DTI) ratio of 43 percent or lower. However, some loan programs may allow DTI ratios up to 50 percent for otherwise qualified borrowers. A lower DTI ratio can improve your chances of getting mortgage approved at a more competitive interest rate.

Ready to take the plunge into homeownership?

Breaking into homeownership takes some upfront work and research, but buyers don't have to do all this work by themselves.

Realtors as well as loan officers can help find the right home and the right way to finance the home purchase. These professionals know the ropes and can work on your behalf to make your dreams happen.

A pre-approval is a great way to start.

...in as little as 3 minutes – no credit impact