What Are the Requirements to Buy Your First Home?

Buying your first home is an exciting experience. Seeing your hard work result in homeownership is empowering.

Like most people, you likely will need a mortgage to finance your home. Understanding the requirements helps make the process easier.

Most lenders are willing to work with first-time homebuyers on credit requirements and down payments. This flexibility makes homeownership more accessible for more people.

The following are requirements for buying your first home.

Good Credit Score

Each type of mortgage has its own credit score requirements. Lower credit scores typically result in higher interest rates.

The minimum credit score requirements to buy a home include:

• Conventional loan: 620

• Federal Housing Authority (FHA) loan: 580, although some lenders go as low as 500 with a 10% down payment

• US Department of Agriculture (USDA) loan: 640

• Department of Veterans Affairs (VA) loan: 580–620, depending on the lender

Along with your credit score, lenders review your credit report, focusing primarily on your most recent history. If you have no credit history, you could still qualify for a mortgage:

• FHA, USDA, VA, and other programs might consider rent, utility, insurance, cell phone payments, or other nontraditional credit to determine how well you handle debt.

• Some conventional lenders might accept a 12-month history of rent and utility payments as evidence of financial stability.

• Many of these mortgages come with higher rates.

Stable Income and Employment

Lenders want confirmation that your monthly income can support a mortgage payment:

• Most lenders desire 24 months of consecutive employment to consider a home loan.

• Self-employed borrowers must provide business and personal tax returns for the past 2 years.

• Lenders typically average a self-employed borrower’s income over the past 24 months for mortgage qualification.

• Showing steady or increasing income is essential.

Financial Documentation

The financial documentation required to apply for a mortgage includes:

• Photo identification

• An employment verification letter

• Recent pay stubs

• Tax returns and W-2s or 1099s for the previous two years

• A year-to-date profit and loss statement if you are self-employed

• Bank statements and information about other assets

• Rental history

• Additional documentation if needed, such as a signed gift letter if you use gift funds for your down payment or closing costs, or a court order if maintenance or child support is included in your income

Approved Budget and Debt-to-Income Ratio

Your debt load impacts how much you can borrow to buy a home:

• Lenders look at your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income spent on debt.

• Your DTI includes property taxes and homeowners’ insurance.

• High amounts of debt from credit cards, student loans, or other installment loans can make qualifying for a mortgage difficult.

• A low DTI ratio can lead to more favorable loan terms, such as lower interest rates.

Maximum DTI limits include the following:

• Conventional loan: 36%-43%

• FHA loan: 43%

• USDA loan: 41%

• VA loan: 41%

Some lenders allow higher DTI ratios with strong compensating factors, such as a large down payment, a high credit score, or additional savings.

Home Appraisal

Most lenders require a home appraisal to verify that the property is worth the loan amount. This process protects against over-lending.

Home Inspection

A home inspection provides a clear understanding of the property’s condition. Uncovering potential issues before submitting an offer can save you a significant amount of money on future home repairs:

• Conventional loans do not require a home inspection.

• FHA loans require homes to meet minimum property standards.

• VA loans require compliance with safety and livability checks.

 Down Payment

Most lenders require a down payment to purchase a home. Closing costs must also be covered.

The minimum down payment requirements include:

• Conventional loan: 3%

• FHA loan: 3.5%

• USDA loan: 0%

• VA loan: 0%

Putting down less than 20% requires paying private mortgage insurance (PMI) until you build enough equity in the home. This insurance protects the lender if you fail to make the monthly payments.

Most buyers make an earnest money deposit with an offer on a home. The money is held in escrow and applied to the down payment on the loan closing date.

Closing Costs

Closing costs typically are 2-5% of the mortgage amount. They cover lender services and fees, such as title searches, title insurance, and home appraisals. A 3% down payment usually results in a cash requirement of 5%–8% of the home’s value to close the transaction.

Sellers might agree to cover part of the closing costs. Also, some lenders offer credits in exchange for a higher interest rate. You could research down payment assistance programs, which provide grants or loans to help with down payments and closing costs.

Although the following are not required, they can facilitate the homebuying process.

Getting Preapproved for a Mortgage  

Mortgage preapproval demonstrates to sellers that you are a serious buyer:

• The preapproval process requires a mortgage application and review of your credit, income, and assets.

• The letter provides a price range for the home and strengthens your offer.

• Most preapproval letters are valid for 90 days and can be refreshed with updated documents.

Working with a Real Estate Agent

An experienced real estate agent can help you find homes, negotiate with sellers, and navigate contracts. They provide valuable expertise and advocate on your behalf throughout the homebuying process.

Be cautious about dual agency, where one agent represents both the buyer and the seller. This arrangement might not be in your best interest.

*This information is for educational purposes only.

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