If you are a first-time homebuyer, you are probably overwhelmed at the many loan options available today. While there isn’t a first-time homebuyer’s loan in particular, there are minimum requirements you’ll have to meet in order to qualify for a mortgage.
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Below we help you understand the basic guidelines of each loan program so you can see where you stand.
CREDIT SCORE REQUIREMENTS
One of the first things lenders look at when determining your eligibility for a home loan is your credit score. Of course, you want it to be a good score, but what scores do loan programs require for first-time homebuyers?
- Conventional loans – These loans have the toughest requirements. You’ll need around a 680 credit score to qualify for a conventional loan. In some cases, borrowers squeeze through with a lower credit score, but only because their other qualifying factors are well above the minimum requirements.
- FHA loans – FHA loans have more relaxed guidelines. In fact, they have one of the lowest credit score requirements today. You only need a 580 credit score to secure an FHA loan. In fact, the FHA even allows credit scores as low as 500, but you’ll need a higher down payment of at least 10% in order to do so.
- VA loans – Veterans have the benefit of the flexible VA loan guidelines. The VA itself doesn’t have a minimum credit score requirement, but most VA lenders require at least a 620 credit score to qualify.
- USDA loans – If you plan to live in a rural area and don’t make more than 115% of your area’s average median income, you may qualify for a USDA loan if you have a 640 credit score or higher. USDA loans provide 100% financing, which can be a great option for first-time homebuyers.
The next most important factor is your debt ratio. Lenders look at your DTI to make sure that you have enough disposable income to cover the daily cost of living. Each program has their own debt ratio requirements.
- Conventional loans – Just as we said with the credit scores, conventional lenders have the toughest guidelines. You need a maximum housing ratio of 28% and a maximum total debt ratio of 36% when applying for a conventional loan.
- FHA loans – FHA loans have more flexible debt ratio guidelines. Your housing ratio can be as high as 31% of your gross monthly income. Your total debt ratio can be between 41% and 43% in order for you to qualify.
- VA loans – Just as the VA doesn’t have minimum credit score requirements, they also don’t have maximum debt ratio requirements. They do prefer that your total debt ratio doesn’t exceed 43%, but that’s their only requirement pertaining to debt ratios.
- USDA loans – USDA loans have slightly stricter debt ratio guidelines than the FHA. The USDA allows a front-end or housing ratio of 29% and a total debt ratio of 41%.
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STABLE INCOME AND EMPLOYMENT
No matter which program you choose, you’ll need to prove that you have stable employment and/or income. Lenders need to know that you can afford the loan beyond a reasonable doubt. Typically, you’ll need at least a 2-year employment history. It helps if that history is at the same job and not at multiple jobs. Lenders like to know that you are stable and consistent. It helps them feel good about the fact that you’ll be able to pay your mortgage on time.
This doesn’t mean that if you don’t have a two-year employment history that you won’t’ qualify, though. If you just started your career a few months ago after graduating from college, you can prove to the lender that you just graduated. Each lender will have their own guidelines regarding how long you must be at your job in order to qualify.
Even if you have a two-year history but it’s at various jobs, if you have a well written explanation, you may still get approved. Lenders want to know that you aren’t just a flight risk, leaving a job the second you are unhappy. They also want to know that you don’t consistently lose your job because of inconsistent work. Lenders thrive on reliability and consistency when approving borrowers for loans.
Each loan program also has its own down payment requirements. We already discussed the USDA loan that doesn’t require a down payment. The VA loan also doesn’t require a down payment. Conventional and FHA loans, on the other hand, do require a down payment.
- Conventional loans – You’ll need at least a 5% down payment for a conventional loan. The money can come from you or it can be gifted from a relative, employer, or charitable contribution. You must make sure that you follow the documentation guidelines if you do receive the funds as a gift, though.
- FHA loans – You’ll need at least a 3.5% down payment for an FHA loan. This loan program also allows you to receive gift funds for the down payment. You must make sure that you document the gift properly in order for the lender to accept it, though. Talk with your lender about their requirements to make sure you follow them closely.
First-time homebuyers have many options at their disposal when buying a home. While conventional loans have the reputation of being the ‘best loan’ available, there are other options that you can use. Make sure you explore all of your options to ensure that you choose the loan that is right for you.