Floor three
Most of what first-time buyers are told is either out of date or was never true: that you need twenty per cent, that a pre-qualification is a pre-approval, that assistance programmes are free money. This page takes the three things that cost people the most and explains them properly.
Two letters
The two words look interchangeable and are used interchangeably, including by people who should know better. They describe two different amounts of work, and only one of them has been checked by anybody.
Nothing verified
Documents read
The practical consequence is about timing. A pre-qualification is worth having in week one because it is quick and it tells you roughly where you stand. A pre-approval is worth having before you view anything you might actually offer on, because it is the version that survives contact with an underwriter — and because the gap between the two numbers, when there is one, is much better discovered before you have written an offer than after.
Ask for the conditions attached to the pre-approval and keep the list. Those conditions are the documents you will be chased for later, and supplying them early is the single largest thing a buyer can do to keep a closing on schedule.
The calculator for this
Before either letter, do the arithmetic yourself. The affordability page turns income, debts and available cash into a price range and tells you which of the two ratio limits is binding — and if the answer is the debt ratio rather than income, that is a problem you can act on rather than one you have to earn your way out of.
The down payment
Twenty per cent is the level above which conventional mortgage insurance is not charged. That is the whole of its significance. It is not a lending requirement, it never has been, and treating it as one keeps people renting for years while prices and rents move around them.
What a smaller down payment actually costs is mortgage insurance, and that cost differs sharply between programmes: conventional PMI can be cancelled once the scheduled balance reaches eighty per cent of the original value, while FHA’s annual premium runs for the life of the loan when the loan-to-value at origination is above ninety per cent. Two programmes, similar monthly figures, completely different totals over a decade. It is a calculation, and both calculations are on this site.
For eligible borrowers, VA and USDA loans allow no down payment at all and VA charges no monthly mortgage insurance. If either applies to you, read it before anything else on this page.
State housing finance agencies, counties, cities and some employers run assistance programmes. They are usually attached to income limits, a purchase price cap, an occupancy requirement and a homebuyer education course. What varies most — and what people ask about least — is whether the money has to come back.
Money that does not have to be repaid at all. The rarest of the three, usually the smallest, and usually attached to income limits, a purchase price cap and a homebuyer education course.
A second mortgage recorded against the house that is written off over a set number of years, provided you keep living there. Sell or refinance inside that window and some or all of it becomes repayable — which is why the forgiveness schedule is the term to read, not the headline amount.
An actual second loan with a payment of its own, sometimes deferred until you sell. It solves a cash problem today by adding an obligation tomorrow. That can be entirely the right trade; it simply is not free money and should not be presented as such.
Three questions settle almost any assistance offer: does it have to be repaid, what happens if I sell or refinance in the next few years, and does taking it change the interest rate on the first mortgage? Assistance is sometimes paired with a slightly higher rate, which is a perfectly reasonable trade — but only if you know you are making it.
Read the assistance programme pageClosing costs
Closing costs are four different things wearing one label. Only the first is really the lender’s, and the last one is not a cost at all — it is your own money, paid early.
Origination or an underwriting fee, and any discount points you chose to buy. Points are optional and they are a decision with a payback period, which is a calculation rather than a matter of taste.
Price discount points →The appraisal, the credit report, the title search, the title insurance policies, the settlement agent and the survey where one is required. These are other people’s fees passed through, and they are itemised on the Loan Estimate.
Recording fees, and the transfer taxes your state and county levy on a sale. They vary enormously by location and are not negotiable by anybody.
Not fees — your own money paid early. Interest from the closing date to the end of the month, a full year of homeowner’s insurance up front, and several months of taxes and insurance to open the escrow account. This is the line first-time buyers most often have not counted.
See taxes and insurance in a payment →You are given a Loan Estimate within three business days of applying, and a Closing Disclosure at least three business days before you sign. Those two documents use the same layout on purpose, so that you can put them side by side and see what moved. Doing that is the most valuable half-hour available to a first-time buyer, and the waiting period exists specifically to make room for it.
Somebody other than you can pay part of these costs. A seller credit is negotiated with the price and capped by programme. A lender credit trades a higher rate for money towards costs, which is the points decision run backwards. Gift funds from family are widely allowed and always have to be documented — a signed letter saying it is a gift rather than a loan, plus a trail showing where the money came from.
Programmes
A first purchase is not automatically an FHA loan. It is worth pricing a low-down conventional loan beside it, because the mortgage insurance behaves differently and that difference compounds for as long as you hold the loan.
Compare FHA insurance over the loanQuestions
Often, yes. Many assistance programmes define a first-time buyer as somebody who has not held an ownership interest in a primary residence for the previous three years, so a sale several years ago can leave you eligible again. It is a definition set by each programme, so it is worth asking rather than assuming.
Usually not, and it is the wrong tool for the job. A pre-qualification is arithmetic on figures you stated; nobody checked them. A pre-approval is a decision made after somebody verified your income, assets and credit against documents. Sellers can tell the difference, and so can your own budget — the verified number is frequently not the stated one.
It depends on the form it takes. Some assistance is an outright grant. Some is a second lien forgiven over a number of years of continued occupancy. Some is a genuine second mortgage with a payment attached. Those are three very different obligations wearing the same name, so ask which one you are being offered and what happens if you sell early.
Frequently, within limits. Programmes cap how much a seller may contribute towards your costs, and the cap varies by programme and by how much you are putting down. A seller credit is negotiated as part of the offer, so it is a term to raise while the price is still being discussed, not afterwards.
It is a cost to price, not a verdict. Conventional mortgage insurance can be cancelled once the scheduled balance reaches eighty per cent of the original value. FHA’s annual premium runs for the life of the loan when the loan-to-value at origination is above ninety per cent. Put both against several more years of rent and saving, and the answer is genuinely different for different households — which is why it is a calculation rather than a rule.
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