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

The first time you do something is always the hardest, and buying a house is definitely no different. First-time homebuyer loans can help make it easier on first-time homebuyers, offering access to special mortgage programs with low down payments. Sometimes you’ll even find grants to help you with closing costs and down payments. Sound great? Sure it does! But if you don’t know how to get one, then you might feel daunted — even discouraged. With this expert-backed guide, we’re here to help: Here’s how to apply for a first time home buyers loan in eight manageable steps.

Step 1: Make sure you qualify

If you haven’t owned a house in the past three years, you’ll qualify for most first-time buyer programs. (If you own a rental or investment property — even if you don’t live there — then you won’t qualify as a first-time buyer.)

Note that for government-backed first-time home-buyer loans such as FHA or USDA, it’s not just the buyer that must qualify, but the home, too — so check the requirements for your specific mortgage.

Also note that many programs offered at the local or state level also have income restrictions.

Step 2: Research down payment assistance in your area

There are more than 2,500 down payment assistance (DPA) programs, which are run by more than 1,300 different agencies — so there is a lot of potential help out there. These break down into three main categories:

• Grants: These are financial gifts that don’t have to be repaid, and therefore are the most desirable type of assistance.
• Second mortgages: These are loans you can take out to subsidize the down payment in addition to taking out a principal mortgage. These do have to be paid back, but not always starting right away.
• Forgivable second mortgages: These are second mortgages that might not have to be paid back as long as the homeowner meets certain conditions (for example, staying in the home for a period of time).

Now, let’s take a closer look at some of an array of down payment assistance programs available nationwide:

• The Chenoa Fund offers second mortgages (some of them forgivable) at a national level.
• Bank of America has two national DPA programs. Our America’s Home Grant program offers credits for closing costs, and Our Down Payment Grant covers down payments.
• The National Homebuyers Fund, Inc. provides funds for down payments that are usually gifts — meaning that if you follow all the guidelines, then you won’t have to repay them.
• Chase Homebuyer Grant is Chase Bank’s national DPA program.
• FHA Within Reach Down Payment Assistance program is the FHA’s DPA program, though you’ll typically find this program offered through your state’s Housing and Finance Authority.
• The NeighborhoodLIFT program offers forgivable, no-interest second mortgages that can be used for both down payments and closing costs.
• You’ll find the vast majority of DPA programs at state and local levels. A few places to find them include HUD’s list of local homebuying programs, the FHA’s list of state-by-state DPA programs… and, well, Google. Try searching your city or your state’s name with “down payment assistance.” (Your real estate agent is another great resource for help!)

Step 3: Identify which first-time buyer’s program you want to apply for

Next, you’ll want to determine which first-time homebuyer’s program you want to go after. There are several out there that offer some kind of special first-time buyer incentive, and others that just happen to work well for first-time buyers. Here are a few of your options.

FHA loans

This loan backed by the Federal Housing Administration 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

These are backed by the U.S. Department of Veterans Affairs. Service members, veterans, and surviving spouses qualify for these loans with 0% down. They also require no mortgage insurance (though you’ll have to pay some additional fees at closing), have competitive interest rates, and generally offer slightly relaxed credit qualifying standards (although some lenders do have additional requirements above the VA’s).

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. You typically need a credit score of 640 or higher, though note that 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 list price in revitalization areas.

Fannie Mae HomeReady and Freddie Mac Home Possible loans

These Fannie Mae HomeReady and Freddie Mac Home Possible loans vary slightly, but both only require a credit score of 620. 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, where he completes 17% more sales than the average agent.

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

“I can find out by making a phone call what the requirements are. But if I don’t do that, I might show you a home that you love that’s just outside the program, and you don’t qualify. So having an agent who’s done their homework and knows what you need to do — that’s critical.”

Further, he notes, would-be buyers using down payment assistance 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 that 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 any relevant letters from family members providing the funds as gifts, or paperwork from assistance programs.

Documentation for additional assets: Lenders may also want to see you have enough savings and liquid assets to cover your mortgage payments for a period of time if needed. These are called “reserve requirements” and are likely 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 last 60 days of IRA statements, or two months of brokerage account statements.

The lender will verify your financial information and run a credit check. Then, they’ll give you a conditional approval stating the amount of the mortgage you’ve been preapproved for (as well as a good idea of your rate).

Preapproval — an actual conditional loan approval — beats pre-qualification, which is more of an estimate.

Consider this real-world scenario: In Moskowitz’s region, due to COVID, showings shifted to appointment-only. There, most showings required buyers to be preapproved even to make an appointment.

“Now, the market has opened up, but I don’t think that trend is going to change: We’re not going to let anyone into our houses without having a preapproval,” Moskowitz opines. “It’s just too complicated, and you don’t want to get caught up with buyers that aren’t qualified.”

Another reason to get preapproved is because houses sell quickly in a hot market. “If you’re not ready, you will not be able to submit an offer,” Moskowitz says. “And by the time you get your loan, someone else bought your dream house — and now when you drive by that house, you’re going to see another family playing in the front lawn.”

Step 6: Find your home

The process of home shopping is exciting — and daunting — under any circumstances. But if you’re working with a first-time home buyer’s program, you may face additional hurdles in the search because some of these programs have both income limits and geographic limits.

Step 7: Get your documents together

At this stage, you should already be preapproved. But you’re not done gathering your documents or applying for your mortgage! Now, collect the necessary homebuying documents, including:

• Preapproval letter, which spells out the mortgage amount you’ve been preapproved to borrow.

• Purchase agreement, the document that formalizes the purchase and commits both parties to the terms of the contract when signed by both the buyer and the seller.

Step 8: Apply for your first-time home buyer’s loan

If your preapproval is in, the property is copacetic, and your offer has been accepted, then you can apply for that loan.

When your loan application is completed and filed, the lender will also send you a Loan Estimate, a complete estimated financial picture of the loan. The lender is required by law to send this document to you within three business days of receiving your complete loan application so that you have time to ask clarifying questions.

Good luck!

Header Image Source: (Kristi Blokhin / ShutterStock)

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