Buying Another Home? Qualifying as a “First-Time Home Buyer” When It’s Not Your First-Ever Deed

First-time home buyer status can make a purchase more affordable. And you don’t have to be a first-ever deed holder.

“First-timer” is typically defined as someone who (a) actually never held a deed before; or (b) has not owned a primary home for more than three years. Just three years of faithfully holding your deed, and you’re able to get back to “first-timer” status. This brings special benefits your way when you need to buy a new residence.

The Art of Qualifying: Where to Start

First-timers may get a certain percentage knocked off the down payment, or a few thousand dollars in closing-cost help. The search begins by asking a lender. Or by researching the state for available assistance [state name + “first-time buyer program”; then press “hide sponsored results”].

Lenders can tell you about special discounts for a first-time buyer, too. You might also qualify for federal tax credits.

 Helpfully, the rules around who qualifies as a first-time home buyer are more flexible than the phrase suggests. Here’s what “first-time buyers” could look like:

• Renters who hope to acquire their own deeds. They have not held a deed to their primary home over the three recent years. Some might be looking at rent-to-own options where they currently live.

• An owner of a personal residence that they’ve rented out for at least three years. Owning real estate you don’t live in is OK if you’re hoping to qualify for first-time buyer status. So, if you’ve been renting your own home, you may still be eligible.

• Single parents and caregivers who haven’t held a deed to their own homes in three years or more. Some might be recently divorced or separated. Their priority is saving money, and acquiring a stable home for those who depend on them.

• Mobile home owners who do not hold the deed to their land and haven’t held a deed before — or at least not in the past three years. If the home is treated legally as a motor vehicle, the owner may wish to make an offer on a site-built or manufactured home, acquire a deed, and begin building equity.

• Teachers, fire professionals and emergency med techs, police, and also service members (current or former). If you’re in these categories or some other public service role, and haven’t owned your home over the recent three-year period, look for home buyer assistance from your professional associations. Serious savings may be available to you.

Interested in using VA loan benefits to acquire a deed? You may qualify for a VA loan with (nearly) no down payment, and no mortgage insurance requirement.

Checklist: The Basics of First-Time Home Buyer Eligibility

How do you know you’re ready? If you can save more income than you need to spend, and come up with a down payment, you may be ready. And states offer affordability boosts to get their residents (or buyers coming in from elsewhere) on the real estate ladder.

Of course, a lender examines any applicant’s finances carefully. You’ll want to have:

• A debt-to-income ratio of no more than 43% in most cases. Why? Because you’ll need to save money. You’ll need to pay for your move, furnish the home, and maintain it. The lender will expect you to hold a cash in reserve — enough to get you through six months in case of lost income or unexpected debt.  

• A credit score above 700, if possible. Then you’ll pay less in interest. Why? Because a large down payment lowers the lender’s risk. Lenders incentivize buyers to come up with a lot up front because of this risk factor. Getting the lowest rate available matters. Little differences in rates add up to big savings over the years.

• Sufficient resources to cover upkeep and property taxes. (Calculate tax this way: Assessed home value X local tax rate. A home assessed for tax purposes at $250,000, multiplied by a 2% local tax rate, comes out to $5K annually.)

• Potentially, a plan to refinance. Say you have a suboptimal credit score, but still want to buy, and possibly refinance when conditions are better. You can still apply. A 620 credit score or higher brings you into the range for loans backed by Freddie Mac or Fannie Mae. FHA-backed loans are available for scores as low as 580. Keep risk in mind. The mortgage rates may not go your way, so refinancing later may not work out.

• A clean credit profile, with no debts in collection status, and a low use level. That is, keep your balance at or below 30% of any card’s limits.

• Two years of evidence (tax records and pay stubs) of steady job income. If you are a gig worker or an independent contractor, you may still qualify through a lender willing to work with nontraditional income earners. See our Gig Worker’s Guide to Home Buying for more information.

Note that some programs are not open to applicants over a specific income level.

Now, what if you qualify as a first-time buyer but you’re co-buying with someone who isn’t? That depends on the lender. You might wish to wait until you both qualify.

Troubleshooting: Common Down Payment Issues to Watch

Are you ready with a down payment? With first-time home buyer status, you might need just 3% down. VA and USDA loans generally do not require a minimum of ready funds available from the applicant.

Still, consider the benefits in putting down what you can. Know this:

• If your down payment is under 20%, lenders add PMI — private mortgage insurance — to your monthly mortgage debt. This extra payment adds to your monthly housing costs.
• Your home insurance premiums can also be impacted by your down payment. An insurer knows you’re in a stronger position to hold onto your deed if you have a good chunk of equity wrapped up in it.

Maybe you’re lucky and your parents are standing by, willing to give you a financial boost. Ask the lender if your parents’ gift can be an acceptable source of funds. Your lender will want to see where your funds come from, to judge your ability to repay the debt on your own. A lender will ask for a down payment gift letter to identify your parents (or another helper), to show the dollar amount, and to trace the origin of the funds in play. The letter will need to truthfully attest that the funds amount to a gift, not a loan. 

Looking at other ways to fund your purchase? Some people dive into their retirement accounts early. Check the rules. Anticipate possible fees for early distributions (if applicable to your particular form of account, given your first-time home buyer status). You could be looking at extra income taxes.

If All Else Fails, You Might Want to Tap Your Connections

It’s the market — not you. This real estate market has been tough as nails for most of our current century. Some hopeful buyers are teaming up to take it on. While it takes considerable work to undertake a co-buying mission, it’s one way to begin building equity in a home, so we mention it here.

We hope the above considerations encourage you along your journey to a first (or “first”) deed.

Please note: We cannot provide financial or legal advice. For case-specific queries, consult a licensed professional in your state.