What You Need to Know As a First-Time Home Buyer

Owning a home is still a cornerstone of the American dream. A 2022 Bankrate survey found that Americans view homeownership as the highest indication of prosperity.^[i] They ranked homeownership above having a career, children, or a college education.

If you want to become a homeowner for the first time, you probably have a lot of questions about the home-buying process. How much money should I save for a down payment? What credit score do I need? What happens during the mortgage application process?

In this article, we’ll break down what you need to know as a first-time home buyer. We’ll also highlight some helpful tips that can make purchasing a home easier and more affordable. If you want to learn more, sign up to be the first to receive our full first-time homebuyer guide, coming April 2023.

What is a First-Time Home Buyer?

To start, you may be surprised to learn that the definition of “first-time home buyer” includes some groups of people who have owned homes in the past. Knowing whether or not you qualify as a first-time home buyer is important. After all, your status as a first-time homebuyer can make you eligible for more affordable down payment programs, special tax breaks, and more.

According to the U.S. Department of Housing and Urban Development (HUD), a first-time homebuyer is anyone who falls into one of the following categories:^[ii]

- A person who hasn’t owned a principal residence in the past three years.
- A person who is married to someone who hasn’t owned a principal residence in the past three years.
- A single parent who has only owned a home with their former spouse.
- A displaced homemaker who has only owned a home with a spouse.
- A person who has only owned a primary residence that wasn’t attached to a permanent foundation in line with applicable regulations.
- A person who has only owned property that didn’t comply with state, local, or model building codes which can’t be brought into compliance for less than it costs to construct a new structure.

Thanks to this inclusive definition, more people can take advantage of down payment and closing cost assistance programs for first-time homebuyers. First-time home buyers also enjoy the opportunity to withdraw up to $10,000 from their IRA or Roth IRA accounts to use towards down payment costs without incurring the 10% penalty. Just keep in mind that you must put the funds towards your home purchase within 120 days or the penalty will take effect.^[iii]

Want to learn more? Download the First-Time Homebuyers Guide today at certifiedcredit.com/first-time-homebuyer-guide/.

What Steps Are Involved in Buying a Home?

If you want to become a first-time home buyer, just follow these six steps:

#1 Audit Your Finances

Buying a home is one of the biggest financial decisions you’ll ever make. Thus, you want to start the process with a clear picture of your current financial situation.

Before you start your home search, you should take stock of your:

- Savings – While first-time homebuyers can qualify for programs with down payments as low as 3%,^[iv] you still need a decent amount of money saved to pay for everything involved in purchasing a home. In addition to the down payment, you’ll also need to pay for closing costs, home inspections, and more.

- Credit score – Next, you should check your credit report and credit score. Start by reviewing your credit report for any errors. If you notice some mistakes, you can dispute them with the associated credit bureau. After that, make sure that your credit score is high enough to qualify for a mortgage. Here are the credit score requirements for the following types of loans:^[v]
  - Conventional – 620
  - FHA – 580
  - VA – 580
  - USDA – 640

No matter which loan program you use, having a higher credit score can help you qualify for a lower interest rate and better loan terms.

If your score is too low, you may need to pause your home search and return to it after a few months of credit score improvement. This way, you can have a better shot at qualifying for affordable financing.

- Employment – After checking your credit, you’ll want to scrutinize your current employment situation through the eyes of a lender. Do you have a stable job? Is your income reliable? How long have you been in this position?Lenders prefer approving applicants with stable employment histories and sufficient incomes. If you don’t already possess these qualities, you may want to work on them before embarking on your home search.
- Debt – Finally, make sure to tally up your monthly debts, including any recurring payments for credit cards, auto loans, student loans, alimony, and child support. Lenders will use your monthly debts to calculate your debt-to-income (DTI) ratio. They do so by dividing your monthly debts by your gross monthly income. If this ratio is above a certain percentage (43% for most mortgage lenders), you may have a harder time qualifying for a mortgage.^[vi] In turn, you may want to pay down your debt before trying to buy a home.

#2 Clarify Your Budget

After you’ve audited your finances, it’s time to clarify your home-buying budget. Getting prequalified with a lender can help you find out how large of a mortgage you can qualify for so you can adapt your home search accordingly.

The process for applying for prequalification is quick and easy. It doesn’t require as much documentation as a formal mortgage application. Better yet, it won’t hurt your credit score, so you can apply for prequalification with several lenders and shop around for the best rate.

After you submit your application, your lender will let you know whether or not you meet their basic criteria. If you do, they’ll share an estimate of the types of loan terms you can qualify for with them. At this time, you can also ask lenders about the special programs you may qualify for as a first-time home buyer.

#3 Apply for Pre-Approval

After reviewing your mortgage offers, you can get pre-qualified with your favorite lender. A pre-approval application requires more documentation than a prequalification soft pull application. That’s because it gives you temporary approval for a mortgage loan that you can show to sellers to let them know you’re a serious buyer.

Pre-approval and formal mortgage applications typically require the following documents:^[vii]

- - Photo ID
  - Tax returns
  - W-2s or pay stubs
  - Bank statements
  - Assets
  - Down payment documentation
  - Gift letters (if your family or friends are helping you pay for the house)

It’s important to make sure that all of your information is accurate. After all, lenders use advanced mortgage fraud detection software these days. Once you provide your information, your lender will conduct a hard inquiry into your credit report. They’ll also verify your income and employment information through third-party companies or by calling your employer directly.

If you want to apply with multiple lenders, make sure you do so within a 45-day window.^[viii] This way, your credit score will only receive one hard inquiry rather than several. (Hard inquiries can lower your credit score slightly for a few months). If you get approved by multiple lenders, you can review their loan offers and select the one that offers the best rate and terms. Don’t forget to review each lender’s fees, as they can vary greatly.

Pre-approval letters remain active for 90 days. If you get accepted for an offer on a home during this time and your financial situation remains the same, you may not have to fill out a formal application. You can simply close on your pre-approved loan instead.

#3 Start the Home Search

With your mortgage pre-approval ready to go, you can finally start the fun part of the process: Searching for a home! You can do so by:

- - Browsing online listings on websites like Zillow, Redfin, and Trulia
  - Hiring a realtor to look for homes on your behalf
  - Attending open houses in your favorite neighborhoods
  - Asking friends and family to keep an eye out for you

As you look at different homes, keep in mind that you may not be able to afford your dream home as a first-time home buyer, and that’s okay! A starter home can help you build valuable equity that makes your dream home a reality in the future.

#4 Make an Offer

If you’re already pre-approved for your mortgage loan, you can go ahead and submit an offer on a home as soon as you find one that meets your requirements. Your realtor can help you determine the right amount to offer, as well as the conditions you should request.

Once you’ve submitted your offer, the seller can choose to accept it or present you with a counter offer. This process may continue back and forth until an acceptable negotiation has been reached.

Depending on the housing market, you may have to compete with other buyers for your chosen home. If you’re outbid by another buyer, you’ll have to start your home search again.

#5 Conduct a Home Inspection

If your realtor delivers the exciting news that your offer is accepted, you’ll enter escrow. Escrow is a period of time when the seller takes the home off the market until you finalize the transaction.^[ix]

During this time, you can request to have the home inspected. If the home inspection turns up any defects that weren’t disclosed to you initially, you can rescind your offer, ask the seller to make repairs, or request them to lower the price accordingly.

#6 Close On Your Mortgage

If all goes well during your home inspection, you can complete the final step of finalizing your mortgage. At this point, you’ll need to pay your lender’s closing costs, which can range from 3% to 6% of your home’s purchase price.^[x] You’ll also have to sign a lot of paperwork.

Once you’ve finalized your mortgage and closed escrow, it’s official! You can grab your new home keys and start moving in. Just make sure to make all of your mortgage payments on time.

Learn More About Mortgages From Certified Credit

Purchasing a home can be an emotional process. If you follow the steps outlined above, you can set yourself up to get the best mortgage possible and move through each step with confidence. To receive the full First-Time Homebuyer Guide visit certifiedcredit.com/first-time-homebuyer-guide/.

To learn more about mortgages and credit score improvement tools, check out the Certified Credit blog.

For Mortgage Lenders

If you’re a loan officer looking to enhance your borrower education, feel free to pass along this article to your customers. You can also browse our selection of mortgage lending solutions.

Here at Certified Credit, we offer:

- Affordable tri-merge credit reports
- Automated borrower retention and lead generation tools
- Automated prequalification
- Automated employment verification for mortgage
- Automated income verification for mortgage
- Automated undisclosed debt monitoring
- Credit score improvement tools
- Flood zone determinations
- Fraud and risk support
- Settlement services