We receive a lot of mortgage-related questions from our readers. One of the most common questions is: What are the minimum mortgage loan requirements for first-time home buyers?
In other words, what does a first-time buyer needed to do and have in order to qualify for a mortgage loan?
This is actually a multi-part question, because there are several parts to the mortgage underwriting and approval process. We’ve broken it down below.
At a glance: Generally speaking, borrowers need a good credit score of 600 or higher, a debt-to-income ratio no higher than 50%, steady income, and enough funds to cover their down payment and closing costs. But those requirements aren’t written in stone.
Minimum Mortgage Requirements for First-Time Buyers
Mortgage requirements for first-time home buyers can vary from one lender to the next, and also among the different loan programs. But there are some common “ingredients” used across the industry. So let’s focus on those.
For the most part, mortgage qualifications and requirements are the same for first-time and repeat home buyers alike. There really isn’t much distinction, from an eligibility standpoint. But there are quite a few financing programs available for first-time buyers — and we’ll cover those below.
Down Payment Requirements in 2018
If you’re going to use a conventional home loan (that is not insured by the government) to buy a house, you’ll probably have to make a down payment of at least 3% of the purchase price or appraised value.
Fannie Mae and Freddie Mac, the two government-sponsored corporations that buy home loans from lenders, will purchase mortgage loans with up to 97% of the home value – but usually no higher than that. That means the lowest down payment requirement for first-time home buyers using a conventional loan is 3% in most cases.
Federal Housing Administration (FHA) home loans allow eligible borrowers to make a down payment as low as 3.5% of the purchase price or appraised value. First-time buyers must have a credit score of 580 or higher to qualify for this down-payment option.
VA loans (for military members and veterans) typically offer 100% financing. That means there is no down payment requirement for a first-time home buyer who uses a VA-guaranteed mortgage loan. That’s a huge benefit for those who are eligible for this particular program.
Credit Score Requirements in 2018
Credit scores are another important mortgage requirement for first-time home buyers. These three-digit numbers give lenders some insight into how you have borrowed and repaid money in the past. Credit scores are based on information contained within a person’s credit report history, which includes such things as car loans, credit cards, and other forms of borrowing activity.
There is some leeway when it comes to credit score requirements for first-time home buyers. For a conventional loan, mortgage lenders prefer to see a score of 600 or higher (on the FICO scale which goes from 300 850). But that number is not set in stone. Some lenders might require a slightly higher score, while others will go lower. But 600 is a pretty good indicator of where the bar is set in 2018.
First-time home buyers using an FHA loan will have to meet a separate set of mortgage requirements. Those rules are established by the Department of Housing and Urban Development. According to current HUD guidelines, FHA home buyers need a credit score of at least 500 just to be eligible for the program. To qualify for the 3.5% down payment mentioned above, borrowers need a score of 580 or higher.
This is why we encourage borrowers to check their credit scores, before applying for a loan.
Debt-to-Income Ratios in 2018
Debt ratios are another important mortgage loan requirement for first-time home buyers. And this is an area where we have seen a bit of easing over the last couple of years. Lenders today are allowing higher debt levels than they were two or three years ago, and this is partly due to policy changes made by Freddie Mac and Fannie Mae.
Earlier this year, Fannie Mae announced it was increasing its debt ratio limit for the loans it can purchase. They raised the debt-to-income limit from 45% to 50%, for the back end. This means that a home buyer could have combined debts (including the mortgage loan) totaling 50% of their monthly income, and still potentially qualify for a mortgage loan.
These changes will be particularly helpful for first-time home buyers who have significant debts already, from car loans, student loans, personal loans, etc. Such borrowers could have an easier time qualifying for a mortgage loan in 2018.
Learn more about income requirements for borrowers.
Survey: Lenders Have Eased Their Guidelines for Borrowers
In September of 2017, Fannie Mae released the results of its latest Mortgage Lender Sentiment Survey®, for the third quarter of 2017. This survey polls senior executives of banks and other lenders on a quarterly basis, in order to “assess their views and outlook across varied dimensions of the mortgage market.”
Their latest survey (to date) showed that most lenders have relaxed their mortgage requirements for first-time and repeat home buyers.
According to the company’s news release: “Across all loan types – GSE Eligible, Non-GSE Eligible, and Government – the net share of lenders who reported easing credit standards over the prior three months reached a new high since the survey’s inception in March 2014, after climbing each quarter since Q4 2016.”
Disclaimer: This article provides a basic overview of mortgage loan requirements for first-time buyers in 2018. The home loan process is highly individualized. Every lending scenario is different, because every borrower is different. Additionally, the minimum qualification requirements can vary from one loan product or program to the next. As a result, portions of this article might not apply to your particular situation.