How to Apply For a First-Time Home Buyers Loan: Simplifying the Process Into 8 Doable Steps

Step 3: Identify the right first-time buyer’s program for you

Next, you’ll need to choose the first-time homebuyer program that suits you best. Various programs offer special incentives for first-time buyers, while others are simply well-suited for those purchasing their first home. Here are some options to consider.

FHA loans

This loan backed by the FHA is ideal for those with low savings or a just-OK credit score. You can qualify for loans with as little as 3.5% down if you have a minimum credit score of 580. If you put down 10% or more, you may be able to qualify with a credit score as low as 500.

VA loans

VA loans are home loans backed by the U.S. Department of Veterans Affairs. Service members, veterans, and surviving spouses qualify for these loans with 0% down. They also do not require mortgage insurance, though you will need to cover some additional fees at closing. They offer competitive interest rates and generally have more flexible credit qualification standards, although some lenders might have extra requirements beyond those set by the VA.

USDA loans

These loans from the U.S. Department of Agriculture apply to rural areas, and they’re geared toward low- and middle-income buyers. They offer 0% down and low interest rates. There is no required credit score, but income limits do apply.

Good Neighbor Next Door

Qualify for this program sponsored by the Department of Housing and Urban Development (HUD) if you are an emergency medical technician, firefighter, K-12 teacher, or law enforcement officer. It offers select properties for 50% off the appraised value in revitalization areas.

Fannie Mae HomeReady and Freddie Mac Home Possible loans

These Fannie Mae HomeReady and Freddie Mac Home Possible® loans vary slightly. HomeReady requires a credit score of 620, and Home Possible requires a credit score of 660. For these loans, qualified first-time buyers can make a down payment as low as 3%.

Mark Moskowitz is a top-selling agent in the Agoura Hills area of Los Angeles who works with over 80% more single family homes than the average Agoura Hills agent.

“You don’t have to be an expert on any specific program,” Moskowitz says of the importance of working with an experienced agent as you pursue the perfect program for you.

Further, he says would-be buyers using DPA might find a challenging landscape in an uber-competitive market. That said, some of these loan programs make you a more attractive buyer than others.

“If you’re getting down payment assistance, you’re much better going with an FHA loan. And if you’re a veteran, you can get in with no money down with a VA loan. Those are by far the best programs, and we’ve had a lot of success,” Moskowitz says.

Your best bet is to link up with a local lender who knows the assistance programs and requirements in your area, Moskowitz says.

Pro tip: Not only can a great lender help you through the process of getting a loan, but a lender that provides top-notch personalized service can use this opportunity to help you button up your finances across the bigger picture, too.

“It is very important in the beginning of this process to sit down with a good lender,” Moskowitz says. An experienced loan originator has seen a lot of different credit scenarios and might be able to provide you tips on how to manage your debt to improve your credit. For an even deeper dive, the best advice is to consult a professional financial advisor to guide you on how to manage your debt and finances, specific to your exact scenario.

Step 4: Take care of any first-time-buyer classes you might be required to finish

You might be required to complete some coursework to underscore the responsibilities involved with homeownership. These classes may be available online or in-person, and you will need to supply a certificate of completion to your loan officer.

Remember that sometimes these are matching programs, so you’ll still need to bring a down payment to the table.

Step 5: Get preapproved for your loan

Get preapproved for a loan at this stage. To do so, you must fill out a preapproval application and give your lender documentation of your financial picture.

Here’s an overview of the documents you might need to apply:

Proof of income: Lenders want to see one to two years of W2s or 1099s and tax returns as evidence of steady income. If you receive regular overtime and/or bonuses, Fannie Mae guidelines require you to provide two years of tax returns or W2s to show consistency. In addition to returns, lenders want W2 employees to provide 30 days worth of current pay stubs.

Other proof-of-income documentation may include a year-to-date profit and loss statement, letters explaining any gaps in employment, and proof of other income such as child support, Social Security income, and tips or gratuities.

Down payment plan: If your down payment is in the bank, be prepared to provide the lender with two months of bank statements. To show your ability to pay the down payment, you may also need letters from any family members providing the funds as gifts, or paperwork from assistance programs.

Documentation for additional assets: Lenders may also want to see that you have enough savings and liquid assets to cover your mortgage payments for a period of time, if needed. These are called “reserve requirements” — typically in your checking and savings accounts — but you may be able to use retirement and investment accounts to satisfy reserve requirements. Documentation in this category might include bank statements for at least the most recent two months, the last quarterly statement for your 401k or retirement accounts, the past 60 days of IRA statements, or two months of brokerage account statements.

The lender will first verify your financial information and conduct a credit check. After this, they will provide you with a conditional approval, which includes the amount of mortgage you’ve been preapproved for and an estimate of your interest rate. This preapproval, which is a more concrete conditional loan approval, is more reliable than a prequalification, which only offers an estimate.

In a competitive market where homes sell quickly, obtaining preapproval is crucial. Moskowitz explains that being prepared means you can submit an offer immediately. Without preapproval, you risk losing your ideal home to another buyer. Imagine driving past that house later and seeing another family enjoying the front lawn. Preapproval helps you avoid that scenario.