First-Time Homebuyers FAQ
What is a down payment?
A down payment is the amount of money you pay upfront toward the purchase price of a home. The rest is financed through your mortgage. Depending on the loan program, down payments can be as low as 0% (for VA loans), 3% (for some Conventional first-time buyer programs), or higher.
What are closing costs?
Closing costs are the fees you pay at the end of the home-buying process to finalize your loan. These can include appraisal fees, title insurance, escrow fees, lender charges, and prepaid items like property taxes or homeowners insurance. They typically range from 2%–5% of the purchase price.
What is a Debt-to-Income (DTI) ratio?
Your DTI ratio compares your monthly debt payments (like credit cards, car loans, and student loans) to your gross monthly income. Lenders use it to measure how much of your income goes toward debt and how much is available for a mortgage. A lower DTI generally improves your chances of qualifying for a home loan.
What are discount points (rate buydown or rebate)?
Discount points are optional fees you can pay at closing to lower your mortgage interest rate. One “point” equals 1% of the loan amount. This is sometimes called a rate buydown. On the flip side, you may choose a slightly higher interest rate in exchange for a lender credit, often called a rebate, which reduces your upfront closing costs.
What are lender credits?
Lender credits are funds provided by the lender to help cover part or all of your closing costs. In exchange, you’ll typically accept a slightly higher interest rate. This can be helpful if you want to reduce your upfront expenses.
What is mortgage insurance and when is it required?
Mortgage insurance protects the lender if you stop making payments on your loan. Conventional loans require Private Mortgage Insurance (PMI) if your down payment is less than 20%. FHA loans require a similar insurance called MIP regardless of down payment. VA loans do not require mortgage insurance.
Who qualifies as a first-time homebuyer?
You are considered a first-time homebuyer if you have not owned a primary residence within the past 3 years. This definition applies even if you owned a home before that time or if you only owned property that wasn’t your primary residence.
What is the Conventional Loan 3% First-Time Homebuyer Program?
This program allows qualified first-time buyers to purchase a home with as little as 3% down. It offers lower down payment requirements, flexible terms, and in some cases reduced mortgage insurance costs. It’s a great option for buyers with limited savings who still want the stability of a conventional loan.
What is earnest money?
Earnest money is a deposit you make when your offer on a home is accepted. It shows the seller that you’re serious about buying. The money is usually applied toward your down payment or closing costs at closing.
What is escrow?
Escrow is a neutral third party that holds money and documents until the home purchase is finalized. After closing, your escrow account is often used to manage property taxes and homeowners insurance, so those bills are paid on time automatically.
What are prepaid expenses?
Prepaids are upfront payments you make at closing for items like property taxes, homeowners insurance, and mortgage interest. They are not fees, but advance payments for future expenses.
What is the difference between pre-qualification and pre-approval?
Pre-qualification is an estimate of what you might be able to borrow, based on basic information you provide.
Pre-approval is a more thorough process where a lender verifies your income, assets, credit, and debts. Pre-approval carries more weight with sellers and gives you a clearer picture of your budget.
How much house can I afford?
This depends on your income, debts, credit, down payment, and the loan program you choose. A common rule of thumb is that your housing payment should not exceed about 28–31% of your gross monthly income, but every situation is unique.
