Down Payment Options for First-Time Homebuyers
First-time homebuyer questions about down payments are among the most common — and for good reason. There are more options available than most buyers realize.
Special loan programs for first-time buyers
Yes. Primarily the programs are for down payment assistance. Several, like the Texas Housing Finance Agency, offer zero down payment programs, but those typically come with a higher interest rate. A good site to check out is Down Payment Resource, which offers many programs in Texas.
Other ways to come up with the down payment
In my experience, first-time homebuyers most often save their money (sometimes for years), borrow from their retirement plan, or get a gift or a loan from family members. For military in-service members or veterans, there is a Veterans Affairs' zero down loan program.
How much money will you need for a home purchase?
It depends on the sales price and the loan program, for starters. Assuming you don't do a zero-down program, you can be putting down as little as 3% of the sales price. For example, on a $350,000 home, you'd be putting $10,500 down. You also will have to come up with closing costs — assuming the seller isn't paying those charges. Closing costs can roughly be 2-4% of the sales price. You will have to come up with another $10,500 (assuming 3% for closing costs) in the example above.
Understanding Credit for a Home Loan
Hard pulls vs. soft pulls on your credit report
Initially, a soft pull can be used to get a borrower pre-approved for a mortgage. A soft pull offers just one score, and that pull doesn't affect credit scores. Once the buyer is in escrow, we will have to do a hard pull to get all three scores, which is required by lenders.
What if you don't have enough credit to generate credit scores?
You can manufacture scores by being added to someone else's credit card account. Another way is to go to your bank and get a secured credit card. That means you put, say, $500 as security. Your bank provides you with $500 as a credit card credit. You borrow and pay back each month for at least six months using a FICO score. For a VantageScore, you can generate a score in as little as one month. Another way to quickly generate a VantageScore is to have your rent and utilities reported to the credit bureaus.
What if you have a co-signer who already owns a home?
First-time buyer programs typically require the occupying borrower(s) not to have owned a home in the last three years. However, non-occupant co-signers can be homeowners. Though, not every program allows non-occupant co-signers.
Timing, Rates, and Mortgage Types
Should you buy now or wait for interest rates to come down?
If you are ready, able and qualified to purchase a home, it's probably better to buy now instead of waiting. Over time, home values always go up. That also means the longer you wait, the more expensive a home might become. And there is no guarantee if or when mortgage rates are going to come down. If and when they do come down, you can always refinance to a lower rate.
Fixed rate or adjustable-rate mortgage?
I recommend you get a fixed rate. It's stable, and you don't have to worry and wonder where rates will go. There are a few exceptions. For example, if you know you are going to own the home for less than five years, you can get a better interest rate and payment on an adjustable-rate mortgage that is locked in for at least five years. Another example is if the adjustable-rate mortgage has a significantly lower interest rate (1% or more lower) than the fixed-rate mortgage, saving you hundreds and hundreds of dollars each month, it could be worth the gamble.
Private Mortgage Insurance and What You Can Actually Afford
Why do you have to pay for private mortgage insurance (PMI)?
If you are not putting at least 20% down, lenders require you to pay PMI. It's an insurance policy that protects the lender if you default on the mortgage. For conventional mortgages, your lender must remove the PMI once your loan balance is paid down by 22% of the original balance under the Homeowners Protection Act. Or, once you have 20% equity (equity is the property value minus the loan balance), you can request PMI to be removed by your lender. You need to have on-time payment history, and you will need to pay for an appraisal to confirm the value. For a 30-year FHA mortgage, the monthly mortgage insurance stays on for the life of the loan. The only way to get rid of it is to refinance out of the FHA loan.
Qualifying for a home loan vs. affording a home loan
Typically, lenders will give you an idea of the most for which you can qualify for during the pre-approval process. You may not want to go that high because you cannot personally afford it. Just because a lender says you are qualified for X, you don't have to borrow X. You should always stay in your comfort zone. You want to be able to sleep at night without being stressed about how you are going to afford the mortgage and all the other costs of life and homeownership.
First-Time Buyer Mistakes to Avoid
Don't go out and take on new credit while you are home shopping or in the middle of escrow. Lenders track your credit until the loan funds. More debt can mean no longer being able to qualify. Make sure you have additional funds available to pay for property maintenance, repairs and utilities that you might not be used to paying for as a renter. Don't quit your job or get yourself fired in the middle of escrow. The lender will call the employer to verify your current employment. No job. No loan.
Frequently Asked Questions
Can I use gift money from a family member for my down payment?
Yes. Receiving a gift or a loan from family members is one of the most common ways first-time homebuyers come up with their down payment. Be sure to check with your loan officer about gift letter requirements, as lenders will typically need documentation to verify the source of the funds.
How do I know how much home I can truly afford?
While your lender will give you a maximum qualification amount during pre-approval, that number doesn't always reflect what you can comfortably afford. Consider all your monthly costs — mortgage, maintenance, utilities, repairs — and choose a payment that lets you stay in your comfort zone and sleep at night without financial stress.
When does private mortgage insurance (PMI) go away?
For conventional loans, your lender is required to remove PMI once your loan balance is paid down to 78% of the original purchase price under the Homeowners Protection Act. You can also request removal once you reach 20% equity, provided you have an on-time payment history and a supporting appraisal. For FHA loans, mortgage insurance stays for the life of a 30-year loan and can only be eliminated by refinancing out of the FHA loan.
Does applying for a mortgage hurt my credit score?
Initially, your loan officer can use a soft pull to get you pre-approved, which does not affect your credit score. However, once you are in escrow, a hard pull will be required to retrieve all three credit scores as required by lenders. The hard pull will have a minor, temporary impact on your score.
What are the biggest mistakes first-time buyers make during escrow?
The most common and costly mistakes include taking on new debt or opening new credit accounts during the home shopping or escrow process, and leaving or losing a job before the loan closes. Lenders monitor your credit and verify your employment right up until the loan funds. Either of these actions can disqualify you and kill the deal.
