How to Qualify for a Loan: Tips for First Time Home Buyers

Last Updated on August 25, 2023 by Kimberly Crawford

As a first-time home buyer, one of the biggest challenges is figuring out how to qualify for a mortgage. Even if you have a good income and credit, qualifying for a mortgage loan for your dream house can be quite tricky

On that note, here are some tips to help you qualify for a mortgage loan.

Save early

The first step towards getting a mortgage loan as a first-time homebuyer is getting your down payment. A down payment is the upfront payment a person makes in order to finance a project – or in this case, a house. 

The ideal down payment for a property is normally placed at 6% but it might differ based on the home loan rates offered by your lender, for example, if you are looking to purchase a house that cost $300,000 you would be expected to make an upfront payment of $60,000. 

Depending on the home you are looking to purchase, your down payment might cost a lot which is why it is advisable to start saving long before you are ready to buy a house. 

That way you’ll be able to make the down payment with ease.

A great way to save would be to set aside a certain amount of money each month to put towards your down payment.

This amount can be contributed from your existing savings or your monthly income. You should be able to raise this money from your monthly gross income. 

If you are able to save more, that is great but don’t feel like you have to save a certain percentage of your income.

Choose a home you can afford

When looking for a home to buy it is important that you take great care to choose one that you can afford. Before you decide to buy a house you need to take into cognizance the total cost of the purchase and also do a rough estimate of how much the mortgage would cost. 

This would give you an idea as to how much you would be paying monthly. If you are getting that property it is important to ensure that the purchase would not totally offset your debt-income ratio. 

Keep in mind that if you face difficulty and are unable to pay your mortgage loan your lender can foreclose on the property in a bid to recover their losses

Raise your credit

Your credit score is one of the major determinants of your mortgage. An individual with a low credit rating has a limited chance of qualifying for a mortgage loan. 

If you have a low credit score before making a mortgage application you have to increase your credit score and one of the fastest ways to do so is by querying your credit score report. 

This is because there might be some mismatch or incorrect data on the report affecting your credit – and querying it can lead to a quick rise in your credit rating.

Low credit scores are often caused by being delinquent on things like credit card debt payments or car loans so it is important to make sure you are up to date on your payments in order to maintain a healthy credit score.

Another option to improve your credit rating is to piggyback off that of a family or close friend. You can do this by becoming an authorized user. 

An authorized user means that if your family or friend has a good credit score it will positively reflect on your credit report. However, if your family or friend has bad credit it can negatively affect you.

You can also ask for an increased credit limit though this is dependent on your income, if your credit limit is increased but your utilization remains the same there is a positive effect on your credit rating.

However, you might not be approved for a higher credit limit if your income does not fit your lender’s requirement. You can also pay off other debts, this plays a positive effect on your debt to income ratio. 

As the name reads your debt to income ratio is the proportion of your monthly debt payments to your monthly gross income. 

If you have a low debt to income ratio lenders would believe that you can afford to take on a new mortgage loan. On average if you want to qualify for a mortgage loan your debt to income ratio should be below 43%.

Decide on your mortgage option

There are a number of mortgage options that are available to you and it is important to choose one that suits you best. These mortgage options hold different eligibility qualifications and down payments. 

Examples of these mortgage options include:

Conventional mortgages

home tax deduction mortgage

The most common type of home loan is a conventional home loan. A conventional home loan is a loan that is funded through a bank rather than a mortgage company. 

Conventional loans are subject to lending guidelines set by the bank and are more likely to be approved than a first-time home buyer loan. If you have a good credit history and are able to obtain a conventional loan you should have no problem purchasing your first home.

Conventional mortgages can offer first home buyers as low as a 3% down payment for their property. It is not as restricted as a government loan and they come in different forms in a bid to satisfy a borrower’s needs.

FHA loans

The Federal Housing Administration (FHA) is a government agency that insures home loans. The FHA requires a down payment of as low as 3.5% for FHA-insured loans which enables low and moderate-income families to purchase homes. 

The FHA also offers special programs for first-time home buyers, elderly home buyers, and those with disabilities. The FHA requires a mortgage insurance premium (MIP) which is paid monthly.

USDA loans

The USDA loan program is set up to cover rural areas as a means of encouraging rural development. The USDA loan program provides financing for homes, businesses, and farms in rural areas. The USDA offers zero-interest loans to qualified farmers and ranchers. The USDA requires a mortgage insurance premium (MIP) which is paid monthly.

VA loans

A VA loan is a veteran mortgage loan. The veteran affair loan program is open to individuals who have served in the United States military and their eligible spouses. 

VA loans offer competitive interest rates and most of the time little to no down payments.

To apply for a VA loan, you will need to provide your lender with a copy of your Veteran Affidavit. 

The Veteran Affidavit is a document that is signed by a notary and states that you are a veteran and eligible for a VA loan. 

You will need to provide a copy of this document to your lender when applying for a VA loan. You will also need to provide a copy of your military service record or DD-214 which is your discharge papers if you served in the military.

Another category of mortgage plans you should look at is based on the time period. 

There are 30-year and 15-year mortgage plans.

The interest rate for 30-year mortgage plans is high but the monthly payments are low making them relatively easy to pay. 

For 15-year mortgage plans, the interest rates are lower but that means that the monthly payments are way above that of the 30-year mortgage plan. Make sure you choose the right mortgage option for you.

Check out first time home buyer assistance programs

There are government assistance programs in states and cities set up to help out first-time homebuyers with low or moderate-income. 

This assistance often comes in the form of grants and individuals are not required to pay back.

Taking your time to review first time home buyer assistance programs can offer you the financial assistance you might need to purchase your dream property.

Compare mortgage interest rates

Comparing mortgage interest rates is your next step on your road to purchasing your first home. Make a list of all the lenders offering you the mortgage option that suits you and take into consideration the varying interest rates. 

This is the most efficient way of deciding what mortgage lender to go with. You should note that different lenders have different requirements so apart from taking a look at the mortgage interest rates you should also consider the additional loan requirements.

Make sure you are not taking any new financing

It’s worth noting that you are not allowed to take any new financing while applying for a home loan. 

This includes taking out any new credit cards, taking additional loans, and taking out a home equity loan. 

This is to ensure that you have the necessary funds to meet your mortgage commitments. You should only take new finance after you have obtained a mortgage approval.

Get a pre-approval letter

A pre-approval letter is a letter from your lender showing that you have been approved for a particular loan amount. 

A pre-approval letter is a useful tool for a first-time home buyer while house hunting. It shows real estate agents and property owners that you are serious about getting a home and this puts you at an advantage over other house hunters who haven’t gotten a pre-approval letter.

When you apply for a pre-approval letter your mortgage lender takes into cognizance your credit, income and debts as a means of determining the details of the pre-approval letter. 

It is possible for you to apply for a pre-approval letter from more than one lender but you must ensure to take steps so as not to negatively influence your credit.

Put together your paperwork for your loan application

Have all the necessary paperwork ready for your loan application. Make a list of all the documents and paperwork you will need to have ready for your loan application. 

This will include your pre-approval letter, a list of any additional fees you will be paying and a list of any documents you will be submitting with your loan application. It is also a good idea to consult your financial advisor before you head out to the lending institution.

Take into consideration Closing costs

Closing costs are fees that are charged at the closing of a real estate transaction. They include attorney fees, recording fees, and other miscellaneous fees. 

It is important to take closing costs into consideration when calculating how much you can afford to pay for a home.

Closing is the final day of settlement when money exchanges hands, projections would have been done prior to this day but it might come as a shock how much closing costs might be. It is estimated that closing costs can be between 2-5 %. 

However this is dependent on the region and your lender

Take note of all additional fees

Take note of all the additional fees charged by the lender. This might include extra fees for processing the documents at the closing, for a credit check, for a mortgage pre-approval letter, or for a home appraisal. 

It is important to note that different lenders have different requirements so make sure you consult the lender for the exact amount of additional fees they want you to pay. 

Consult your financial advisor

Now that you have all the documents and paperwork ready it’s time to consult your financial advisor. 

Your financial advisor will be able to provide you with advice regarding the best loan to apply for. 

Your financial advisor will also walk you through the steps to getting a mortgage loan this way you can ensure that you make no mistakes when making a loan application.