The First Time Home Buyer’s Go-To Cheat Sheet: Great Programs, Pro Tips, and Common Mistakes

Scarce inventory and booming home prices have put increasing pressure on first-time homebuyers, despite low mortgage rates. As these obstacles mount, the share of first-time buyers fell to 31% of home purchases in 2020, down from 33% the year prior and marking the lowest share since 1987, according to data from the National Association of Realtors.

Some of the biggest challenges first-time homebuyers face include piecing together the down payment, having a sufficient credit history, and finding the right property. In addition, the large volume of paperwork required to get a mortgage can be overwhelming.

But that doesn’t mean you should shy away from homeownership. You’ll likely find the transition to what may be a roomier and more private abode to be well worth the effort, especially post-COVID-19. If you can overcome these roadblocks, your dream home awaits — and help is out there!

To give you a leg up on your first-ever home purchase, we’ve put together this guide featuring insights on the variety of programs you may be able to use to make buying a house more attainable, plus pro tips and rookie mistakes to avoid so you can act like you’ve done this before.

Loans and programs available to help first-time buyers

As a first-time homebuyer, you don’t have the luxury of using equity from your existing home to supplement your down payment. This can make the “20% down” you’ve heard as being the norm sound impossible to achieve.

However, what you may not realize is that the median down payment for first-time buyers in 2020 was actually 7%, and certain loan programs make it easier to put less down even with imperfect credit.

With less than 20% down, you’ll have to pay private mortgage insurance on a conventional loan, while government-backed loans come with their own form of mortgage insurance for low down payment mortgages.

That’s an extra cost bundled into your monthly housing payments, amounting to 0.5%-1% of the loan amount annually. But sometimes the cost of this insurance can be worth it if it means expediting the path to homeownership.

To jumpstart your homeownership journey, start by exploring some of the first-time homebuyer programs at the federal, state, and local level that may be available to you.

Federal Housing Administration (FHA) loans

The U.S. Department of Housing and Urban Development (HUD) created the Federal Housing Administration (FHA) loan program in 1934 to help more Americans become homeowners. FHA loans provide the chance to borrow for a home with a low down payment, discounted closing costs, and more lenient credit qualifications.

Major benefits, rules, and conditions:

• Borrowers have the ability to put down as little as 3.5% with a credit score of 580 or above (though different lenders can have varying credit requirements). By contrast, conventional loan borrowers will usually need a credit score of 620 or above.
• You can qualify with a credit score as low as 500 with a 10% down payment.
• You will need to pay mortgage insurance (MI) for the life of the loan if you put less than 10% down. FHA buyers who put 10% or more down have to pay MI for 11 years.

More info: Find a local FHA lender in your area using HUD’s Lender List tool, or call around to local banks and lenders to find out what FHA-insured mortgage products they offer.

Good Neighbor Next Door program

This program incentivizes qualifying community members to buy homes in neighborhoods in need of economic and community development with a substantial incentive: You can buy an eligible property for half-off the list price. Properties are listed on the program for seven days, and buyers must qualify based on program guidelines.

Major benefits, rules, and conditions:

• You must be employed as a law enforcement officer, K-12 teacher, firefighter, or emergency medical technician to qualify.
• Homes offered at a discount of 50% off the appraised property value.
• You’ll need to live in the property as your main home for 36 months.
• Limited to specific listings and neighborhoods.

More info: If you meet the conditions, check available listings for your state through the HUD Homes tool.

Freddie Mac Home Possible and Fannie Mae’s HomeReady program

Created by Congress, Freddie Mac and Fannie Mae are both Government Sponsored Entities (GSEs) that have the sole purpose of purchasing mortgage loans from lenders and banks on the secondary mortgage market in order to free up the lender’s capital, allowing them to fund more mortgages and help provide stability and affordability to the housing market. The Home Possible program from Freddie Mac and HomeReady program from Fannie Mae both offer home financing assistance for low-income borrowers with a required education component for first time homebuyers, though there are differences between the two programs.

It’s good to note that these programs are only for homeowners buying a home that will be their principal residence. These programs are not for second homes or rental properties.  As a rule the borrowers will be expected to remain full-time in the home for at least a year before it can be converted to a rental or non-primary residence.

Major benefits, rules, and conditions (Fannie Mae HomeReady):

• The program sets income limits based on an Area’s Median Income. Check to see if you’d qualify based on income level using Fannie Mae’s Area Median Income Lookup Tool. You can search by address or area.
• An “ideal” HomeReady borrower has a credit score of 620 or above. Borrowers with credits scores at or above 680 could qualify for even better pricing.
• You can supplement your own income with non-borrower income, such as income from a parent who will not live in the home, as a compensating factor to qualify for a HomeReady mortgage.
• You must complete homeownership education through the online program called “Framework,” which can be completed in four to six hours.

More info: Use HomeReady’s checklist to see if you’re a good candidate.

Major benefits, rules, and conditions (Freddie Mac Home Possible):

• As of July 2019, you must make less than 80% of the Area Median Income to qualify for Home Possible. You can check income limits on certain properties using the Home Possible Income & Property Eligibility Tool.
• Offers flexible down payment sourcing from families or employer-assistance programs.
• Unlike Fannie Mae’s HomeReady program, you cannot supplement your own income with non-borrower income to qualify.
• Requires participation in a homeownership education program that meets HomePossible guidelines.

More info: Visit the websites for Freddie Mac’s Home Possible or Fannie Mae’s HomeReady.

U.S. Department of Agriculture (USDA) loans

USDA loans help provide low and moderate-income borrowers the opportunity to purchase homes in eligible rural areas. A loan note guarantee reduces the risk for approved USDA lenders to offer 100% financing, which means some USDA borrowers may qualify for no money down.

Major benefits, rules and conditions: 

• Borrowers must meet income-eligibility guidelines, which vary based on the county in which property is based. Income limits are set at $86,850 in most areas for one to four member households, but may go up to $212,550 in higher cost areas.
• The USDA provides several Guaranteed Loan programs. The Single Family Housing Guaranteed program is aimed at moderate-income borrowers, while the Single Family Housing Direct program is for very low income borrowers.
• The property must be a primary residence and based in an eligible area.

More info: Visit the USDA Income and Property Eligibility website for more details.

FHA 203k loan

Not afraid to buy a fixer upper? A 203k loan makes it possible to bundle at least some of the costs of renovating your home into your mortgage. With a 203k loan, you can finance up to $35,000 of a mortgage to repair, improve, and upgrade a home. If your desired property is a fixer-upper that wouldn’t typically be approved for a loan due to safety standards, a 203k loan might make it possible to buy the property, then tap into your mortgage to cover the repair costs. There are still minimum safety and habitability standards for 203k loans, but they certainly offer more flexibility if your dream home needs a little extra love.

Major conditions:

• Work must be completed by a professional contractor who is onboard with the project before you’ll get loan approval.
• The cost of repairs must be at least $5,000 and with a standard 203k loan could theoretically go up to the cost to reconstruct the home so long as there’s an existing foundation that remains intact. The extent of the acceptable rehabilitation will depend on the program you choose and will need to be approved by our lender.
• Loan must come from an approved FHA lender and not exceed FHA mortgage limits for the area.
• Home must be used as a primary residence.

More info: Visit HUD’s landing page for 203k Rehabilitation Mortgage guidance for further details.

Fannie Mae HomeStyle Renovation loan

The HomeStyle Renovation program is for borrowers looking to immediately make updates on a property and who don’t have sufficient reserves to do so with cash. This financing pairs with a conventional mortgage and can be used to finance up to 75% of the “as-completed appraised value of the property.”

Major benefits, rules, and conditions: 

• You can put as low as 3%-5% down if you complete a homeownership education course.
• It can be used on different renovation projects, including repairs, energy updates, landscaping, and luxury updates.
• You must hire a licensed contractor or subcontractor to perform the work.
• You can finance up to six months of housing payments (principal, interest, taxes, and insurance) if the house is uninhabitable.
• Home must be a primary residence.

More info: View additional details at the Fannie Mae HomeStyle Renovation website.

HomeFundIt through CMG Financial

If you need some help coming up with a down payment, you could consider tapping into your personal network for assistance. Online platform HomeFundIt, for example, makes it possible for friends and family to make contributions without having to write paper checks or gift letters.

Major benefits, rules, and conditions:

• HomeFundIt is exclusive to privately held mortgage banking firm CMG Financial, but can be used with standard conventional loans, HomePossible and HomeReady programs.
• The program can not be used with renovation loans, FHA, VA or USDA loans.
• Contributors can give gifts up to $5,000 each using a debit or credit card.
• First-time buyers can get “$2 for every $1 raised… up to the lesser of $1,500 or 1% of the purchase price” to put toward closing costs through the program’s Closing Cost Grant.
• To qualify for the Closing Cost Grant, you must not have owned a home in the past three years, complete a homebuyer education course, and get prequalified for a mortgage with a CMG Loan Officer.
• Asking people to donate to a HomeFundIt campaign could be a great alternative to a wedding, birthday, or graduation gift.
• The platform works better if you can share the campaign with friends and family, or over social media. The more you share, the more likely you are to generate pledges.

More info: Check out the HomeFundIt FAQ page.

State and local homebuying programs

States and local offices sometimes offer incentives and programs to make home buying affordable to residents. Depending on where you look, conditions and qualification rules will vary. But these programs can include down payment assistance, grants, and lower interest rates for first time buyers.

More info: Try this interactive list of home buyer programs by state.

Buyer blunders: Common mistakes to avoid

Don’t rely on beginner’s luck in your first home search. Davenport, Florida agent Bob Anarumo has helped many first-time homebuyers find their dream home over his nearly two decade career. But, he says: “I run into the same problems quite a bit.”

Here are some of the biggest pitfalls to avoid:

Mistake #1: You’re in the dark about your own credit history and finances. 

“A lot of first time buyers don’t know what they’re qualified for or how much money they can actually spend,” Anarumo says. “Many don’t know what their credit score is.” Without a firm understanding of your financial situation, you could be blindsided when meeting with a mortgage lender.

Some of the main factors to consider when you’re budgeting for a home include:

• Your existing debts such as car payments or student loans. Generally, lenders will prefer that if you take out a mortgage, your debt-to-income (DTI) won’t exceed 43%.
• Your credit score, which helps to determine what type of deal a lender is willing to give you on a mortgage based on your past history of paying off debts. A lower credit score translates to a higher interest rate, to account for the perceived risk the lender takes on.
• Your income, which factors into your DTI ratio and in large part determines how much housing you can comfortably afford. As a general guideline, your housing payments including taxes and insurance shouldn’t exceed 30% of your total income, though this can vary based on your individual cost burdens.

If you haven’t looked at your credit in awhile, you’re entitled to order a full credit report at no cost from each of the three main credit bureaus (Experian, Equifax, and TransUnion) every year. You can order one from AnnualCreditReport.com for a quick credit health check. You don’t need perfect credit to buy a home, but if your credit score needs some improvement to secure a better mortgage rate, you can take steps to raise it before buying a house.

In addition, you can run your information through HomeLight’s Home Affordability Calculator which takes into account factors like your current savings, gross annual income, and monthly debt to provide an estimate of how much house you can afford in your city.

Mistake #2: You go with the first lender you meet without shopping around.

Anarumo suggests meeting with two local mortgage lenders and two or three online lenders to compare and contrast their offerings and rates.

“Talk to the different mortgage brokers, answer their questions and then ask them about the specifics of the different mortgage programs that are out there,” he advises. You’re generally looking for the lender who, out of the ones you approach, will offer you the lowest mortgage rate, the least amount of fees at closing, and the best array of programs for your needs.

Mistake #3: You take on too much house.

Buyers often just focus on their monthly mortgage payment when considering the costs of a home. Anarumo advises that you also “look at what it costs to cut the grass, the utilities, and all of the expenses around the property.”

For general upkeep, you should budget 1% of the purchase price of the home annually. You’ll want to consider other hidden expenses like taxes, insurance, and HOA fees that can put you over the edge. There’s nothing fun about buying the house of your dreams then eating ramen in it every night because your mortgage payment consumes your paycheck.

Mistake #4: You forgot about closing costs.

On top of the down payment, you’re on the hook to pay closing costs, which typically add up to between 2%-5% of the loan amount to cover expenses like lender fees, attorney fees, the appraisal and home inspection, taxes, and insurance. Don’t forget these costs can add up fast, and you’ll need them liquid at the time of closing. Closing costs should always be factored into your buying budget.

Mistake #5: You ignore referrals and advice.

Top-selling Sarasota, Florida real estate agent Lori Cashi, who’s part of The Cashi Team, loves helping first-time buyers find their house. But a recent experience with one left her team scrambling last minute.

After referring three home inspectors Cashi could personally vouch for, the buyer went with one cheaper that she found online. The inspector failed to pull permits for work, and missed some obvious issues with the home that would have jeopardized the buyer’s mortgage.

“He had great reviews online,” Cashi reasons. “But Yelp isn’t the same as personal referrals and trusted teams.”

Pro tips for buyers beginning their search

Stay on top of the process with these tips:

Tip #1: Get pre-approved and set your price range before you shop.
“The best time to figure out how much you can afford is before you start looking at houses and falling in love with them,” Anarumo suggests. Work on the hard stuff, like setting your budget and getting pre-approved, first. The house hunt can come after, and with it, a sense of relief because the properties you step foot will ideally be in your price range.

Tip #2: Be open to a home’s potential.
“I find that first time buyers, because of their inexperience, don’t look beyond what they’re seeing as to what it could be,” Anarumo says. Envision the less-than-pristine home you’re touring with a few cosmetic changes. Imagine tearing down the dated wallpaper, updating the counters, and slapping on a fresh coat of white paint. Small cosmetic updates can make all the difference, as long as you keep an open mind.

Tip #3: Don’t be afraid to ask questions.
The most successful buyers are the ones who don’t assume they know it all, Anamuro explains. “I had this buyer that didn’t have a clue, but asked a whole lot of questions. This person actually realized she wasn’t an expert, and I think that’s one of the reasons why everything went so well.”

Header Image Source: (Brooke Cagle / Unsplash)