Homeownership 101: What first-time buyers need to know about credit, loans, requirements

For many first-time buyers, the idea of purchasing a home can feel overwhelming, especially when navigating mortgages, credit scores and down payments.

However, getting started may be simpler than it seems and more possible than many realize, according to Barbara Frederick, a financial service officer at Community State Bank in Morrison.

Credit: The starting point

No matter where you fall on the credit scale, a look at your credit score and history is the universal starting point.

“Credit is so important because it determines what type of loan you would have and what kind of down payments would be required,” Frederick said.

Not all buyers walk in knowing their credit score, so the bank starts with a soft pull, a method that checks their credit without affecting it – similar to what credit card companies do for pre-approvals.

For those who have only used cash and never built a credit history, some lenders may consider alternative credit.

“We look at what they pay monthly: electricity bills, cell phone bills, insurance, rent,” Frederick said. “We could use that as credit … doesn’t necessarily give them a score, but if we can prove they pay things on time, it can help get that loan.”

Next, lenders assess a person’s income and look for consistent employment, paying close attention to any gaps in job history to evaluate overall stability.

Frederick said that generally, banks like to see at least one year of employment, but two years of continuous employment is best. However, some exceptions can be made, such as for recent college graduates.

Credit scores: The numbers behind approval

Credit scores influence everything from eligibility to interest rates.

Scores are calculated by agencies like Equifax, TransUnion, and Experian, with slightly different ranges. For mortgage purposes, Frederick said that a credit score of 780 and above is considered excellent. But anything above 620 is typically workable, depending on other factors.

“Sometimes, you get a denial for a score of 640,” Frederick said. “So other factors are in there, but 620 seems to be the bottom line score for most things.”

Loan types

Here are the key differences between common mortgage options:

Federal Housing Administration (FHA) loans are backed by the government and allow lower credit scores and smaller down payments, some as low as 3.5%.

“But they are pickier with their appraisals,” Frederick said. “You have to have railings on things that are 28 inches or higher… no peeling paint.”

Conventional loans generally require a 5% down payment, though some programs may allow 3%. While they are usually less strict on appraisals, they typically require higher credit scores.

United States Dept. of Veterans Affairs (VA) loans are available to eligible veterans, active-duty service members and certain military spouses. These loans are guaranteed by the VA. No down payment is required, and the home must meet safety and livability standards.

U.S. Department of Agriculture Home Rural Development loans are aimed at low- to moderate-income buyers in eligible rural areas.

These loans come with strict appraisal standards and income limits. For example, Frederick said that in Whiteside County, a household of one to four people must earn less than $112,450 to qualify.

Market trends

Governmental Affairs Director for Illinois REALTORS Neeley Erickson said that today’s housing market reflects a growing divide.

“First-time buyers are navigating high prices, elevated mortgage rates, and limited inventory – often delaying homeownership and requiring higher incomes than previous generations,” Erickson said. “Meanwhile, many current homeowners have built significant equity, giving them a competitive edge with cash offers or large down payments.”

Data from the U.S. Census Bureau validates Erickson’s point on limited affordable housing.

In Crystal Lake, only about 25% of the city’s 11,642 owner-occupied homes are valued below $200,000, while the majority – 8,722 homes – fall between $200,000 and $499,000.

Joliet is facing a similar trend, with the majority of its 38,798 owner-occupied homes valued between $200,000 and $499,000, while only 28% – 10,796 homes – fall under $200,000.

Diane Paxson, a Coldwell Banker real estate agent with decades of experience in the Joliet area, said that much of this is driven by a persistent inventory shortage.

“As of right now, inventory is creeping up a little bit, but it’s still limited,” Paxson said. “A lot of people don’t want to sell because they don’t want to give up their two-and-a-half percent and 3% interest rates.”

Although inventory remains tight, Paxson said that new construction is on the rise in Will County – although it does not always translate to affordability.

“With new construction, now their base price for townhomes is $400,000,” Paxson said. “So it’s difficult for a lot of young families to get into a home because of the prices and what’s going on.”

Still, some support options are available locally. Paxson said the Joliet Down Payment Assistance program helps low-income applicants with down payment assistance.

Still, homes at a lower price point remain rare.

“You can hardly find a single-family home for $200,000 anywhere, even in Joliet,” Paxson said. “You might be able to find one by chance, or maybe a handyman’s special.”

Paxson added that national trends may eventually trickle down to local markets as inventory increases.

“From what I’m reading in our industry papers, there are areas now in different parts of the United States that are dropping because the inventory is starting to pick up,” Paxson said. “So prices are starting to come down.”

Meanwhile, Sterling’s housing market is facing an opposite trend, with the majority of its 4,112 owner-occupied homes valued at under $150,000. This is partly due to Sterling’s aging housing stock — 78% of which were built before 1980, according to data shared late last year by the city’s consulting planner, Dustin Wolff.

“You’re also talking a rural area there,” Paxson said. “That’s a different marketplace, and those homes are going to get a lesser price than they would in a bigger city.”

Common challenges

Frederick said the biggest hurdle she sees among first-time buyers is building credit.

She often assigns potential buyers with “homework,” such as saving receipts, paying bills on time and building a small but reliable credit history.

“If you’re paying rent, get a receipt,” Frederick said. “If you’re paying your utilities on time, that can be alternative credit.”

One of the biggest misconceptions that Frederick hears is how to use credit cards wisely. New cardholders may assume they need to max out their limit and pay minimums. But doing so hurts more than it helps.

She said a good rule of thumb is not to use more than 30% of your card’s maximum limit.

Frederick also recommends secured credit cards or credit-builder loans for those trying to establish a score. These tools let people borrow against their own money while building a payment history.

Lack of inventory

Erickson said that while income and credit matter, the greatest barrier to homeownership is a lack of homes for sale.

“Across Illinois, we are not building enough housing to meet demand,” Erickson said. “This shortage affects all buyers but especially those without existing equity.”

Erickson said that when buyers outnumber available homes, competition intensifies.

“Everyone, from entry-level workers to CEOs, needs housing they can afford near where they work,” Erickson said. “Without options across price points, movement stalls and pressure builds community-wide.”

She said that during the height of the COVID-19 pandemic, interest rates fell below 3%, creating bidding wars as demand surged. While current higher rates have since cooled the market, Erickson said that inventory remains tight and prices are still elevated.

Preparing for the loan

Frederick advises people to begin preparing 6–12 months before applying for a home loan.

“Know your budget, know the income that’s coming in, watch what you spend, and keep track of how you’re spending your money,” Frederick said.

Red flags that can derail a mortgage include going 30 days late on any payment, switching jobs, or taking on new debt.

“I’ve had people get ready to go to closing, they quit or change their jobs...not a good time to do that,” Frederick said. “Or you went and bought a car…that has now changed your debt-to-income ratio.”

Thankfully, there are several programs to assist homebuyers.

One option is a Down Payment Plus program, which provides buyers with money that can be used towards closing costs and down payments. The programs typically operate as a second mortgage that is forgiven after the buyer lives in the home for a set period, often five years.

For those considering buying a home but are unsure where to start, Frederick’s guidance is simple: talk to a lender.

Erickson said that working with a local real estate agent can also be helpful, as they understand community characteristics, housing demand and market trends while helping buyers navigate inspections, insurance, appraisals and contract contingencies. She said they may also offer programs not available through national lenders.

“Jo Daviess County created a locally administered first-time homebuyer program offering up to $25,000 in down payment assistance at a 2% interest rate over 10 years for those who have never owned a home,” Erickson said. “The program is available exclusively through participating local banks.”

In an ever-changing market, Erickson said preparation is what matters most.

“There’s no ‘perfect’ time to buy, only the time that’s right for you,” Erickson said. “Markets will shift, but your readiness is what matters most.”