Purchasing your first home is a journey – one that can take a lot of preparation. The homebuying process can be a confusing one, especially to first-time buyers. Luckily, we’re here to help you prepare – from securing a first time home buyer loan to crossing the threshold of your dream home.
Even as a first-time homebuyer, you probably already know that purchasing a home requires some cash upfront – but what if it didn’t have to? Believe it or not, there are ways to purchase a home with no down payment. First time home buyers actually have a lot of resources and products available to help take this big step – including special first-time home buyer programs.
These can come in the form of first time buyer home loans, first time home buyer tax credit, first-time home buyer grants and more.
So what is a first-time home buyer loan? These are programs that are designed specifically for someone purchasing their first house. They typically feature more flexible options, such as lower down payment amounts, lower interest rates, or using alternative means to establish credit.
This means you can often qualify for first-time home buyer loans with lower credit scores and less money down – which can be a big break for folks just getting started, or those who have suffered a financial loss and are trying to get back on their feet.
Below, we’ll walk you through the different types of programs available, detail the home buying process, and offer some first time home buyer tips to help you get started on the path to your new home.
Types of first-time home buyer programs
If you’re a first-time home buyer, you’re in luck! There are numerous programs, resources, and options to help you purchase your home. As you do your research, you may see references to first time home buyer down payment assistance, first time home buyer grants, and a first time home buyer tax credit.
So what options are available to you, as a first-time buyer?
Down payment assistance (DPA)
Down payment assistance usually comes in the form of special grants offered through either your state, non-profit organizations, local municipalities, or your lender. Typically, buyers can qualify for these grants based on income, credit score, and other factors.
First Merchants’ Next Horizons Mortgage program is one such program that offers down payment assistance to first-time buyers – as well as other benefits – to help them get the keys to their dream home. Our Hometown Heroes program also assists first-time buyers who are first responders, medical professionals, non-profit employees, and school educators.
If you don’t qualify for down payment assistance, it’s possible you’ll qualify for a first time home buyer tax credit, depending on your state and provided you meet certain criteria. This is money you’ll get back on your taxes during the next tax season.
Within First Merchants’ service area, tax credits are available to first time buyers in Indiana and Ohio. Check your state’s website for specific programs.
In some instances, the home seller will cover closing costs – an amount due when you sign your mortgage that can include realtor fees, private mortgage insurance (PMI), escrow, and other fees. However, if it’s not included in your purchase agreement, or if you’re purchasing a foreclosed home, you’ll be on the hook for that money.
But just like down payment assistance programs, there are grants, waivers, and other options to help pay closing costs – particularly for first time buyers.
The home buying process: Step-by-step
Whether you’re planning to purchase a vacation house in Florida, first time homebuyer, or moving for the third time, you’ll want to follow these steps to ensure you’re adequately prepared as you get ready for this big life change:
- Decide how much you can afford: Generally speaking, housing costs should not exceed 28% of your gross monthly income.
- You can determine your house-hunting budget with our mortgage affordability calculator.
- Check your credit score: Low credit scores often result in higher interest rates, or in some cases, denial of a home mortgage. Paying off existing debt like student loans and credit cards can improve your debt-to-income ratio and raise your credit score.
- Start saving for a down payment: Ideally, you’ll invest 20% of the cost of your home in a down payment. If, however, you plan to apply for first-time home buyer grants or first time home buyer down payment assistance, it can be less.
- Get pre-approved: Fill out a mortgage pre-qualification application to see how much home you can afford – this will also give you an
idea of your monthly mortgage payments, and helps you move more quickly through the home buying process.
- First-time homebuyers should prepare copies of their bank statements, most recent pay stubs, tax returns and W2s when applying.
- While getting preapproved is the best way to estimate your mortgage payments, you can also try our mortgage payment calculator! First time home buyer? We have a calculator for that, too.
Once you’ve completed these steps and discussed with a licensed mortgage loan officer, you’re ready to begin house hunting!
Find the perfect house and close the deal
During your pre-approval process, you should have been connected with one of our attentive mortgage loan officers, who will help you as you house hunt and submit offers.
Your mortgage lender is your ally as you search for your dream home – they’ll guide you through the process and will be with you when you finally close on your first home. If you’re hoping to qualify for a first-time homebuyer loan or down payment assistance through First Merchants Next Horizon Mortgage program, our Community Home Lenders are here to help!
The Homebuying Process:
- Search for your home: You can partner with a realtor who will help you find the perfect home, or you can search online for homes for sale in your area. Either option allows you to tailor your search by location, price, number of bedrooms, and more.
- Make an offer: Once you find a home you like, it’s time to submit an offer – your mortgage lender or realtor can help you with this process.
- Do your due diligence: If your offer is accepted, you’ll enter the “due diligence” period, where you have time to get a home inspection and appraisal completed.
- An appraisal ensures the current value of the home aligns with the home’s proposed purchase price. Appraisals take into consideration factors such as the value of recently sold homes in the area (also referred to as comps), the home’s age, condition, location, amenities and more. Most lenders require a home appraisal to be completed before closing the deal.
- Close on your new home: If everything goes smoothly, you’ll proceed to closing! This is where you sign your closing documents and disclosures, including a Mortgage and a Note - your promise to repay the loan, get the deed to your new house, and pay your down payment, closing costs, and any other outstanding fees. You’ll also need to cover things such as title costs, PMI, escrow fees, etc.
You can find more details on this process in our Homebuyers Journey guide.
Who qualifies as a first-time homebuyer?
In general, a first time homebuyer is someone who has never purchased or owned a home before. This means you have not had your name on a title, deed, or foreclosed on a home. With many programs, you may also qualify if you have not purchased or owned a home in the last 3 years.
How do I pick the best mortgage lender?
Choosing the right mortgage lender is an important decision that can have a significant impact on the outcome of your home buying experience. We recommend considering things like the reputation and longevity of the company and loan officer, the level of attentiveness they provide, their willingness to educate and guide first time home buyers, their ability to be agile and adapt quickly to changes in the market, and the variety of programs they offer to meet your needs and goals. A good way to start your search is by asking friends and family for the names of loan officers they have worked with in the past and had a good experience with.
Who qualifies for first-time home buyer programs?
Qualifications for first-time home buyer programs vary widely. Many down payment assistance grants are geared towards low-and-middle income clients. Learn more about First Merchants’ Next Horizon Mortgage program, which assists first-time home buyers.
What credit score do you need to buy a mortgage?
This varies depending on your lender, the amount you are trying to borrow, your down payment amount, and the type of mortgage you’ve applied for. However, there are mortgage programs – like our Next Horizon program – that consider applicants with less than perfect credit, or that use alternative means to establish credit for those with little to no credit history. Talk to your attentive local Mortgage Lender to learn more about credit score requirements.
What is a P&I payment?
A P&I payment stands for “Principal and Interest,” and refers to the two charges that make up the bulk of your monthly mortgage payment. Principal is a portion of the total amount you’ve borrowed, while interest refers to a regular charge that has accrued on the total sum of the loan.
What is an escrow account?
An escrow account can be thought of as a “holding tank” for your property taxes. With an escrow account, the amount you owe in property taxes is divided into monthly payments, which are folded into your monthly mortgage payments. That amount then goes into an escrow account – managed by your mortgage holder – and is paid out by the mortgage holder when your taxes are due.
What do points mean on a mortgage?
Mortgage points are a way to lower the interest rate on your mortgage before purchasing a house. In essence, it’s a fee you pay – in addition to down payment amount – at closing to lower your final interest rate with your mortgage lender. In essence, it’s a discount.
How do I estimate my property taxes?
Your property tax is your home’s value multiplied by your tax rate. Tax rate will vary from state to state and county to county, and may not appear as a full percentage point, but rather as a unit called a “mill.” A mill is a one-to-one-thousand ratio. So if a tax rate is 5 mills, you will pay $5 in tax per $1,000 home value.
Why do I need a home inspection?
Home inspections alert homebuyers to any repairs that may be needed and point out potential health and safety hazards, such as mold, outdated electrical systems or foundation concerns. This gives homebuyers an option to opt out if the home’s conditions don’t meet expectations or negotiate a lower cost from the sellers to address serious problems before finalizing the home sale.
Why does my lender require homeowners' insurance?
Homeowners insurance ensures that major accidents or unexpected damages can be fixed in a timely manner, before they result in secondary damage to your home or costly repairs. It is in both your and your lender’s best interest that your home remains in good shape. If you default on your mortgage or foreclose, the value of your home is used to pay back your lender. Should the worst happen, and your home be destroyed, homeowners’ insurance will help you cover the cost of a new home.
First-time homebuyer? Let First Merchants help you navigate the process.
Finding a home can be an intimidating yet rewarding process for a first-time homebuyer. We recommend working with an expert who can help you navigate the process step by step. Our attentive mortgage lenders have years of experience and are ready to help you start this exciting journey. Meet your local lender.