First-Time Homebuyer's Guide: Down Payments, Mortgages, and Hidden Costs

Are You Actually Ready to Buy?

The honest checklist:

Financial readiness:

✅ Stable income (2+ years same job/industry)

• Lenders want employment history
• Job-hopping = red flag (harder approval)

✅ Emergency fund (3-6 months expenses)

• SEPARATE from down payment
• House emergencies happen (AC breaks, roof leaks)

✅ Credit score 620+ (ideally 740+)

• Below 620 = very hard to qualify
• 740+ = best interest rates (save thousands)

✅ Debt-to-income ratio under 43%

• Formula: (Monthly debt payments ÷ Gross monthly income) × 100
• Example: $1,500 debt / $5,000 income = 30% (good)
• Includes: Car loan, student loans, credit cards, future mortgage

✅ Down payment saved (3.5-20%)

• $300K house = $10,500-60,000 down payment
• More = lower monthly payment

Life readiness:

✅ Planning to stay 5+ years

• Break-even point typically 5 years (closing costs amortized)
• Selling before 5 years = likely lose money

✅ Relationship stable (if buying with partner)

• Breakup + jointly owned house = nightmare

✅ Career location stable

• Job might require moving? Rent instead

✅ Ready for maintenance responsibility

• Landlord fixed everything (free)
• Now YOU fix everything (expensive)

If you checked all boxes → ready If you checked <80% → wait, save more

Understanding Mortgages (The Big Loan)

What you're actually signing:

Mortgage = loan using house as collateral

If you don't pay:

• Bank forecloses (takes house)
• You lose house + down payment

Typical mortgage terms:

• 30 years (360 monthly payments)
• 15 years (180 payments—higher monthly, less interest total)

Fixed-rate vs. Adjustable-rate (ARM):

Fixed-rate (recommended for most): ⭐⭐⭐⭐⭐

• Interest rate never changes (6.5% stays 6.5% for 30 years)
• Payment predictable
• Safe

Adjustable-rate mortgage (ARM):

• Starts lower (5.5% for 5 years)
• Then adjusts annually (can go to 8-10%)
• Risky (payment can increase significantly)
• Only if you're SURE you'll sell/refinance before adjustment

95% of buyers should get fixed-rate (stability worth it)

Down Payments: How Much Do You REALLY Need?

The 20% myth:

Down payment options:

Conventional loan (20% down): ⭐⭐⭐⭐⭐

• Amount: $60,000 on $300K house
• Pros: No PMI (private mortgage insurance), best rates
• Cons: Huge upfront cash

Conventional loan (<20% down):

• Amount: 5-15% down ($15K-45K)
• Pros: Less cash needed
• Cons: PMI required ($100-200/month until 20% equity)

FHA loan (3.5% down): ⭐⭐⭐⭐

• Amount: $10,500 on $300K house
• Pros: Very low down payment, easier approval (credit 580+)
• Cons:
  • Upfront mortgage insurance (1.75% of loan = $5,000)
  • Monthly PMI (0.85% annually = $210/month)
  • PMI for LIFE OF LOAN (unless refinance)

VA loan (0% down): ⭐⭐⭐⭐⭐

• Who: Veterans, active military
• Amount: $0 down payment
• Pros: No down payment, no PMI, best rates
• Cons: Funding fee (2.3% = $6,900 on $300K, can be rolled into loan)

USDA loan (0% down):

• Who: Rural areas, income limits
• Amount: $0 down
• Pros: No down payment, low rates
• Cons: Geographic restrictions (not cities)

Down payment math example:

Scenario: $300,000 house, 30-year mortgage, 6.5% interest

20% down ($60,000):

• Loan amount: $240,000
• Monthly payment: $1,517
• No PMI
• Total monthly: $1,517

5% down ($15,000):

• Loan amount: $285,000
• Monthly payment: $1,801
• PMI: $150/month
• Total monthly: $1,951 ($434 more per month)

Over 30 years: $434 × 360 months = $156,240 more paid

But you keep $45,000 in savings (invest = $200K+ at 10% return over 30 years)

Which is better? Depends on your situation

Hidden Costs (The Shockers)

Beyond down payment + mortgage:

1. Closing costs (2-5% of home price)

On $300K house: $6,000-15,000 due at closing

Includes:

• Loan origination fee: $1,500-3,000
• Appraisal: $400-600 (bank requires)
• Home inspection: $300-500 (optional but HIGHLY recommended)
• Title search and insurance: $1,000-2,000
• Attorney fees: $500-1,500 (some states)
• Recording fees: $100-300
• Property taxes (prepaid): $500-2,000
• Homeowners insurance (prepaid): $1,000-2,000
• HOA transfer fees: $100-500 (if applicable)

Some negotiable (ask seller to pay some closing costs)

2. Property taxes (ongoing, forever)

Amount: 0.5-2.5% of home value annually (varies by location)

Example:

• $300K house in Texas (2% tax rate) = $6,000/year = $500/month
• $300K house in Hawaii (0.3% tax rate) = $900/year = $75/month

Included in monthly mortgage payment (escrowed)

Check BEFORE buying: TexasPropertyTaxes.com or similar (tax rate varies wildly)

3. Homeowners insurance (required by lender)

Cost: $1,000-3,000/year ($80-250/month)

Varies by:

• Location (hurricane zones, wildfire areas = expensive)
• Home age (older = more expensive)
• Coverage amount

Included in monthly mortgage payment (escrowed)

4. PMI - Private Mortgage Insurance (<20% down)

Cost: 0.5-1.5% of loan amount annually

Example:

• $285K loan × 1% = $2,850/year = $237/month

When it ends:

• Conventional loan: Drops off at 20% equity (pay down or refinance)
• FHA loan: Never (must refinance to remove)

Avoid if possible (20% down)

5. HOA fees (if applicable)

Cost: $50-500/month (sometimes $1,000+ in luxury condos)

Covers:

• Common area maintenance (pool, gym, landscaping)
• Exterior maintenance
• Trash, water, sewer (sometimes)

Check HOA rules BEFORE buying:

• Some ban pets, certain paint colors, parking
• Special assessments (surprise $5,000 roof repair bill)

Factor into budget (can't avoid if buying in HOA)

6. Utilities (higher than apartment)

Why more expensive:

• More space to heat/cool
• Yard watering
• Trash/recycling pickup (not included)

Budget: +$100-300/month vs. apartment

7. Maintenance and repairs (1-2% of home value annually)

$300K house = $3,000-6,000/year in maintenance

Common costs:

• HVAC repair/replacement: $5,000-10,000 (every 15-20 years)
• Roof replacement: $8,000-15,000 (every 20-25 years)
• Water heater: $1,000-2,000 (every 10 years)
• Appliances: $500-2,000 each (dishwasher, fridge, washer/dryer)
• Plumbing emergencies: $200-1,000
• Pest control: $300-800/year
• Lawn care: $50-200/month (if you hire out)
• Snow removal: $30-100/storm (if applicable)

Unlike renting: No landlord to call—YOU pay

8. Opportunity cost (hidden but real)

What else could you do with down payment money?

Example:

• $60,000 down payment
• OR: Invest $60,000 in S&P 500 (10% annual return)
• 30 years later: $1,046,000

You "gave up" $1M in investment gains to own house

BUT:

• House also appreciates (3-5% annually)
• $300K house → $700K-1.2M in 30 years
• Plus you lived in it (can't live in S&P 500)

Point: Consider all options (investing vs. buying)

The True Monthly Cost Breakdown

$300,000 house, 6.5% interest, 30-year mortgage:

20% down scenario:

3.5% down FHA scenario:

Plus $10,500 down payment + $8,000 closing costs = $18,500 upfront

Compare to renting:

• Rent: $2,000/month
• Renter's insurance: $20/month
• Utilities: $150/month
• Total: $2,170/month (no maintenance, no property tax)

Homeownership costs $772-1,303 MORE per month in this example

Worth it? Depends on appreciation, tax benefits, and personal preference

The Home Buying Process (Step-by-Step)

What actually happens:

Step 1: Get pre-approved (not just pre-qualified)

Pre-qualified: "You might be able to borrow $300K" (soft estimate) Pre-approved: "We will lend you $300K" (hard commitment)

Process:

• Apply with lender (bank, credit union, online like Rocket Mortgage)
• Submit documents (tax returns, pay stubs, bank statements)
• Credit check (hard inquiry, slight ding to score)
• Receive pre-approval letter (shows sellers you're serious)

Time: 1-3 days

Step 2: Find a real estate agent

Why you need one:

• Buyer's agent is FREE (seller pays commission)
• Knows market, finds listings
• Negotiates on your behalf
• Handles paperwork

Interview 2-3 agents, choose best fit

Step 3: House hunting

See 10-20 houses (typical)

Red flags to watch:

• Foundation cracks
• Water damage (ceiling stains, musty smell)
• Old roof (shingles curling)
• Outdated electrical (fuse box = bad)
• Neighborhood (drive around different times—sketchy at night?)

Step 4: Make an offer

Offer includes:

• Price (often below asking in buyer's market, above in seller's market)
• Contingencies (inspection, appraisal, financing)
• Closing date
• Earnest money deposit (1-3% = $3,000-9,000, held in escrow)

Negotiation: Seller counters, you counter back, eventually agree (or walk away)

Step 5: Home inspection (DO NOT SKIP)

Cost: $300-500

Inspector finds:

• Structural issues (foundation, roof)
• Electrical, plumbing problems
• Mold, pest damage
• Code violations

Use inspection report to:

• Renegotiate price ("Fix $5,000 roof issue or reduce price $5,000")
• Walk away if major problems (inspection contingency protects you)

Step 6: Appraisal

Lender requires appraisal:

• Ensures house worth what you're paying
• If appraisal < offer price = problem

Example:

• Offer: $300K
• Appraisal: $280K
• Bank only lends on $280K (you need extra $20K cash OR renegotiate)

Step 7: Final walkthrough

Day before closing:

• Visit house again
• Confirm seller made agreed repairs
• Check nothing damaged since offer

Step 8: Closing day

Sign 100+ pages:

• Mortgage documents
• Title transfer
• Closing disclosure (final costs)

Bring:

• Cashier's check (down payment + closing costs)
• ID

Receive keys—you own a house! 🎉

First-time homebuyers need 3.5-20% down payment ($10,500-$60,000 on $300,000 house) plus 2-5% closing costs ($6,000-$15,000) totaling $16,500-$75,000 upfront. Monthly costs include mortgage principal-interest ($1,517-$1,838 depending down payment), property tax 0.5-2.5% annually ($75-$500 monthly varying location), homeowners insurance ($100-$250), PMI if under 20% down ($100-$237), HOA fees ($0-$500), maintenance 1-2% annually ($250-$500 monthly budget), utilities ($200). True monthly cost $2,942-$3,473 versus $2,000 rent—homeownership costs more short-term but builds equity long-term. Get mortgage pre-approval before house hunting showing sellers serious buyer, hire buyer's agent (free—seller pays commission), never skip $300-$500 home inspection revealing hidden $5,000+ repair costs negotiating leverage, plan staying 5+ years breaking even closing costs amortizing.