November 26, 2019

Guide to Down Payments for First-Time Home Buyers

Understanding down payments makes all the difference for first-time home buyers. The down payment influences many aspects of the process, including loan eligibility and the overall cost of that loan.


You'll repeatedly hear that it's best to put down at least 20% of the home's sale price and finance the rest with a mortgage, and that's the truth. Being able to put down 20% shows a lender that you're less of a risk. The less risky you appear as a buyer, the more likely it is that you'll be able to bypass private mortgage insurance (PMI) costs and qualify for better interest rates.


Best case scenario, you've saved diligently, and the bank gave you a gold star for being the prime candidate for homeownership! Nice work! That said, few first-time home buyers can find that 20% down payment. The National Association of Realtors found that the median down payment was only 6% for first-time buyers in 2019. For that reason, there are many first-time home buyer programs available to help alleviate the stress of saving for a down payment and make homeownership a reality.


We'll go through all of that here, so get comfortable.

Table of Contents

How to Talk About Down Payments: Glossary of Important Terms
Steps to Buying Your First Home
You're Preapproved! What to Know After You Get Approved for a First-Time Home Buyer Mortgage
What Are Contingencies When Buying a House?
How to Make an Offer on a House
What to Negotiate When Buying Your First House
Where Does a Down Payment Come From?
What Are the Types of Mortgages?
Interest Rates: How Much Interest Will I Owe on My Mortgage?
What is Private Mortgage Insurance?
How Do I Get a No-PMI Mortgage?
How to Apply and Qualify for a Mortgage
Checklist: Documents You Need When Applying for a Mortgage
Avoid These Common Mistakes When Applying for First-Time Home Buyer Loan

How to Talk About Down Payments: Glossary of Important Terms


Escrow? Contingencies? Fixed interest?


Before you read on, learn to talk the talk. Open our first-time home buyer definitions guide in another tab for quick reference. Learning the common terms involved with buying a home will put first-time home buyers at ease as they navigate the process.


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Steps to Buying Your First Home

  • Create a list of potential mortgage lenders and learn more about their interest rates. Your individual qualifications will influence the interest rate that you receive, but you should still shop around for a lender who can offer you a competitively low rate to save yourself money.
  • Get a bank's preapproval to prove to yourself—and to a seller—that you are a serious buyer who is qualified to purchase a home within a certain price range. A loan officer who represents a mortgage lender will help you understand loan options.
  • Consider looking into grants or home co-investment options once you have an idea of what price range you can afford.
  • Work with a real estate agent to explore homes in your price range. Scour online listings, too.
  • Work with your real estate agent to put in a formal offer once you find a house that you want.
  • The written offer is commonly a templated form. In the offer, you will outline all of the details about the property, the dollar amount offered, any contingencies, a time frame for offer expiration and ideal closing date. It is your responsibility as a buyer to list an expiration date for the offer, whether you want feedback within 24 hours or would like to give the seller up to 1 week to get back to you. Once you sign and date the offer, the real estate agent will deliver it to the seller's real estate agent.
  • If your offer is accepted, depending on the terms of your loan and contingencies, you will need to coordinate with a home inspector for an inspection within a few days and possibly other property assessments, too.
  • Use the resulting reports to validate whether the price you're paying is fair, or use it as an opportunity to ask the sellers for assistance if anything undisclosed was discovered.
  • You will also apply for your loan formally and continue to work with your mortgage lender to confirm details like the interest rate and monthly mortgage payment.
  • Once the negotiations are finalized, the paperwork moves to the individual buyer's and seller's attorneys who will navigate the legal aspects of the transaction and confirm when/how much money is due into escrow to close by the agreed-upon date.
  • If you're in a seller's market and your offer isn't selected, don't let it get you down. Consider what you need to do to make yourself a more competitive home buyer. You may need to look at a lower price point or improve your credit score by paying down credit cards. You may choose to continue saving, or research co-investments, to make a stronger offer.


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You're Preapproved! What to Know After You Get Preapproved for a First-Time Home Buyer Mortgage


Young couple meets with loan officer to finalize a first-time mortgage

Excellent work! A mortgage prequalification proves that you're financially prepared to find your home. You'll be able to secure a mortgage loan for a specific loan amount. Most lenders will tell you that the preapproval is valid for 60–90 days. When house hunting, preapproval for a home loan shows the seller and their agent that your intent to buy is serious and not spontaneous.


Keep that letter stating your mortgage preapproval status on hand so that you and your real estate agent can use it when making an offer.


While you're in the home buying process, avoid making other large purchases or withdrawals that may affect your debt-to-income ratio. The mortgage lender will need to validate that your credit report and bank statements still reflect what you shared with them during the preapproval process, so avoid racking up credit card debt during the home buying process.


You may have a sense of interest rate trends if you're monitoring the home loan market. But once you have an offer accepted, your mortgage lender and underwriter will help you lock in the best rate for your loan, based on your eligibility.


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What Are Contingencies When Buying a House?


The contingencies you list reflect what has to happen for you to complete the home purchase. Rarely are offers written without contingencies.

  • Inspection contingency: A home inspection contingency allows the buyer to get a closer look at the condition of the home they are buying and validate that the property is what the seller says it is. A home inspection is performed by a third-party hired by the home buyer.
  • Appraisal and financing contingencies: To protect the buyer if the bank decides that the offer on the home doesn't meet the fair market value or if the buyer is unable to secure financing.
  • Title contingency: If there are liens against the property, the buyer can express that their willingness to buy depends on the seller's ability to pay off the debt before the sale.
  • Home sale contingency: Though it does not come into play with first-time home buyers, a buyer who also needs to sell their current home to liquidate assets for a down payment on a new home may state that their intent to purchase is contingent on the sale of their existing home in a certain time frame. A first-time buyer may encounter that the seller requests a home sale contingency in their counteroffer.
  • Other things you want: You can include as many contingencies as you'd like in your offer. However, remember that contingencies that are complicated, seem risky, or suggest that you're demanding or high maintenance may steer the seller away from your offer.

If any of your contingencies don't work out as expected, odds are that you'll lose your earnest money deposit. Earnest money is a good faith cash deposit from the buyer. It's collected within 48 hours of an offer being accepted and stored in an escrow account held by the escrow agent. It shows commitment from the buyer, but also protects the seller in case the deal falls through before closing.


If the sale of the home doesn't meet all contingencies and doesn't reach closing, the money is used to cover expenses that would have been factored into the closing costs. Expenses could be your real estate agent, inspection and attorney fees—professional parties involved with the sale.


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How to Make an Offer on a House


You found your dream home! Your real estate agent is standing by to help you through the process of making an offer, and a good real estate agent will help you do it quickly to try to beat any other offers to the table. Even better? A great real estate agent will be tapped into the market and can help your offer stand out from the rest.


If you're preapproved, you will know what type of loan you are looking to secure and will share this information with the seller in your offer letter. Include your asking price, and let the seller know what contingencies, such as a home inspection or closing schedule, need to be considered. In the offer letter, you will state that your offer must be reviewed and accepted by a certain date. No one likes waiting indefinitely, so it's normal to request feedback within 3–5 days.


If you are not preapproved, the seller may not consider you a serious buyer. They may worry that the intent to finance won't actualize, or simply fear that it could slow down their sale. There's a total trickle-down effect—the seller might have an offer on their new home with a home sale contingency, and they would prefer to chance a safe offer. One way to bypass the preapproval is to get creative with your offer by reducing contingencies and show the seller that you have a substantial deposit of earnest money with a notarized bank statement.


How do you know what price to offer? It's difficult to know whether to offer more or less than the asking price. Have an understanding of your competition, the price of the home relative to its assessment and other comparable properties in the area. Both your real estate agent and loan officer can help you justify the purchase price you offer.


If it's a buyer's market, don't be afraid of throwing out a low offer price.


In a seller's market, you may need to go higher than the list price, but that's when understanding the comps comes into play. Use public information about similar (comparable) homes that have recently sold in the same area to validate the amount you decide to offer.


Also, be prepared for a counteroffer from the seller. A counteroffer is your opportunity to try again—you can accept their modified terms or try to compromise to reach a sale agreement. You may need to use this counteroffer time to look into other options such as a different type of mortgage or a co-investment.


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What to Negotiate When Buying Your First House


A well-prepared first-time home buyer may feel more equipped to navigate negotiations when buying real estate because it's usually more involved than agreeing upon an offer price and sale price. It may also take several missed opportunities to determine what to negotiate for homes in your market.


Consider additional terms to help your offer stand out:

  • Closing costs: Will you cover, or should you ask the seller? If you need closing cost assistance, this is the time to bring it up.
  • Repairs: Many lenders do not mandate a home inspection, but if home improvements are necessary, you may use the inspection report as leverage to alter your offer price or ask the seller to fix issues before sale.
  • Contingencies: Fewer contingencies may put the buyer at risk but make for a more compelling offer.
  • Appliances or other products in the home: Many sellers will share what items in the home are included in their asking price. But consider this an opportunity to clarify terms for the items you're unsure about that may alter your offer price.
  • Closing schedule: If your real estate agent is able to learn more about the seller, they may advise you to be flexible with the closing date, in case the seller has a home sale contingency. They may also learn that the seller needs the sale to move quickly and can advise you to recommend a faster closing schedule.

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Where Does a Down Payment Come From?


A down payment can come from any number of sources, but it's not always easy for first-time home buyers. Maybe you've been dropping a percentage of your paycheck into a savings account. Maybe you just received a sudden windfall or inheritance. Whether your down payment was earned, a gift, or the result of a whirlwind crowdsourcing initiative by your tech-savvy cousin, it's a valuable lump sum that's critical to the home buying process.


If you're struggling to produce that nest egg, crunch some numbers:

  • Figure out how much you need to save, and on what timeline.
  • Look at your own costs, and cut back if it means you'll be able to save more every month until you've met your goals.
  • Set up an automatic savings plan, and redirect a portion of your income directly into that account.
  • Save your bonuses, birthday checks and tax returns because they can go a long way in helping you meet your goals faster.
  • Review your finances, and know what loan amount and monthly payments you can afford when you do eventually find your dream home.

Government-backed loans make it possible for certain home buyers to purchase with 0–3% of the home's value, meaning that very little cash is required upfront. The government takes a risk on buyers offering a low down payment, and most loans layer in additional mortgage insurance or specific requirements.


A home co-investment can also make it easier to find the money you need for a down payment. For example, here at Unison, we make it possible for a homeowner to put down a smaller amount of their own funds because Unison can invest the rest, helping the buyer get to their 20% down payment.


How does that work? Unison doesn't charge you interest or require monthly payments. Rather, when you sell your home up to 30 years later, the company shares in the change in value of the home.


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What Are the Types of Mortgages?


Young man standing on the front steps in front of house looking to buy real estate residential neighborhood

Conventional loan

Most conventional mortgages are issued by private lenders to home buyers. They require buyers to have a minimum 20% down payment, low debt-to-income ratio, and a high credit score. If you have less than 20% for a down payment, lenders generally require PMI. Conventional loans are typically suitable for buyers looking for larger amounts of money. The loan industry also refers to conventional loans as nonagency loans.


Federal Housing Administration (FHA) loan

Put as little as 3.5% down with a government-backed loan. Buyers with more debt or less-than-perfect credit may qualify for an FHA loan if they meet strict debt-to-income guidelines and have 3.5% to put down. FHA loans contain two types of mortgage insurance. The first is a financed component, which raises your loan balance, and the second is a monthly policy.


Contrary to popular belief, FHA monthly mortgage insurance can be removed after 11 years provided the borrower has put down 10% or more. Otherwise, the only way to get out of FHA mortgage insurance is to refinance to a non-FHA loan.


VA loan

Servicemembers, veterans, and eligible surviving spouses may qualify for a government-backed VA loan, which requires no down payment or PMI. However, some of these loans do come with a funding fee, and the property must meet certain conditions. VA loans have a variable fee, and it can be zero if the veteran has a duty-related disability.


USDA loan

Funded by the U.S. Department of Agriculture and servicing home buyers in rural areas, this loan also offers 0% down payment, low interest rates and low mortgage insurance premiums for buyers who meet specific income qualifications.


Fannie/Freddie 3% down loan

These programs make it possible for homeowners within certain income qualifications to get a loan with just 3% down, without needing to qualify for an FHA loan.


EEM loan

A more energy-efficient home leaves homeowners with more money in their pocket. The Energy Efficient Mortgage (EEM) is a loan that works to provide benefits to borrowers that are purchasing an energy-efficient home, or to those preparing to make energy-saving improvements. The buyer only needs to qualify for the cost of the home itself, prior to upgrades.


203K loan

A rehab mortgage is advantageous for home buyers looking to purchase a house in need of repair. Though accompanied by a more complicated lending process, it allows buyers to finance improvements into the cost of their mortgage, so that upgrades can be spread out and paid back over the life of the loan. Buyers will have to partner with a certified contractor to qualify the extent of the repairs.


HELOC loan

A home equity line of credit (HELOC), commonly known as "a second mortgage," is a loan for an existing homeowner. Many homeowners will use a HELOC to afford improvements for their home, such as a renovation or a new roof. Qualifications can be stricter, sometimes requiring homeowners to have at least 15–20% equity in their home, have less than 50% debt-to-income ratio and a good credit score.


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Interest Rates: How Much Interest Will I Owe on My Mortgage?


Interest is an amount that you pay back to the lender in exchange for borrowing the money for your home. Think of it as a price tag on your loan, a cost paid back little by little through your monthly payment.


You can secure a fixed-rate loan, or an adjustable-rate loan, but personal qualifications also come into play when a lender determines what rate you can receive. If you have a great credit score and are considered a low-risk borrower, you'll get a better rate than if you are deemed a riskier borrower. Regardless of the rate, the total amount you pay in interest annually may be a federal tax deduction (consult with your tax advisor).


Every month, the interest due is calculated based on your loan amount and factored into your monthly payment. Buyers should take the time to notice how the allocation of a monthly payment will shift over the years. The idea of reviewing amortization schedules might sound intimidating, but it makes it easier to understand where your monthly payment goes and how it changes over time. As you gain home equity and your loan balance decreases, less money goes to interest and more to the principal balance.


With an adjustable-rate mortgage (ARM) it can be more challenging to calculate the total interest paid over the life of the loan. Your lender can help offer an estimate based on forecasts and historical data.


The Truth-in-Lending disclosure you receive before committing to your loan outlines all disclosures for the agreement, including the annual percentage rate (APR). Use an online calculator to understand how the APR and interest rate adds to the total cost of your home over the life of the loan. Such tools also compare the advantages of choosing a 30-year loan versus a shorter duration and demonstrate how even a half-percent interest rate variance can affect your monthly payment.


You can continue to rate shop even after you have your mortgage set up, because if rates drop, you may find that you can save money on interest by refinancing at a lower interest rate.


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What is Private Mortgage Insurance?


Private mortgage insurance (PMI) comes into play when a borrower is unable to make a down payment of 20% of the home's purchase price. The extra insurance, mandated by most mortgage lenders, helps to protect the bank in case the buyer defaults on their loan and the home slides into foreclosure. PMI is calculated based on a number of factors, including a buyer's credit score.


With conventional loans (non-FHA), PMI is a monthly payment that is no longer required after the borrower reaches a loan-to-value of 80% or less.


Other types of mortgage loans (such as FHA) mandate a monthly mortgage insurance premium for the life of the loan, unless the borrower is able to refinance to a conventional loan when they have 20% equity in their investment.


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How Do I Get a No-PMI Mortgage?


If you're able to afford a 20% down payment at the time you're ready to purchase your new home, you can avoid private mortgage insurance (PMI).


It's advantageous for home buyers to either save up the 20% or explore financing options, including co-investment, to find ways to bypass the need for PMI on your loan.


PMI adds cost to your monthly payment and it's not tax deductible. Quite simply, if you're putting money toward insurance, you're not able to put it against the principal (or that new couch you've been eyeing).


Home buyers with conventional loans will be able to eliminate PMI and lower their monthly payment once they have 20% of equity in their home.


Buyers with other types of loans (such as FHA) must refinance to a conventional loan once they have 20% equity if they wish to avoid insurance costs, because mortgage insurance premiums are attached to the FHA home loan until the loan is paid off in full.


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How to Apply and Qualify for a Mortgage


If you're preapproved, you've already given the mortgage lender a lot of information that is required for your mortgage application. The mortgage lender and your personal loan officer will work with you to further formalize the details of your new home loan, taking into account whether it will be your primary residence (not a rental property), taxes and escrow requirements and interest rate.


They may ask you for additional personal banking information, such as new pay stubs, new tax returns if recently filed, or request justification for any changes to your accounts or credit report.


If you didn't get preapproved before finding your dream home, get ready to lay all your cards out on the table. The bank will need to review your personal finances and qualify the home you are trying to buy.


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Checklist: Documents You Need When Applying for a Mortgage

  • Proof of income: Tax returns, pay stubs, W-2s and 1099s. For contractors and freelancers, consider providing copies of contracts to prove future income as well.
  • Credit verification.
  • Statements for all bank accounts and retirement savings to show assets.
  • Rent payment record.
  • Gift statements.
  • Accepted offer letter that outlines terms of the home purchase agreement.
  • If you have previously filed for bankruptcy or undergone foreclosure, the bank will also need documentation about those events.

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Avoid These Common Mistakes When Applying for First-Time Home Buyer Loan


interracial couple giving each other a high five after moving into a new house

Navigating the home buying process can be confusing—even for those buyers who do their research. Make yourself a to-do list, and plan out what you need to do to get yourself into your dream home:

  • Create an honest budget for yourself. Include a cushion for improvements, routine maintenance, tax fluctuations and utilities. Remember, you won't have a landlord to cover these costs. Don't stretch yourself too thin when it comes to determining how much home you can afford.
  • Avoid credit issues by improving your credit score by making payments on time and keeping credit card balances low.
  • Avoid buying a home that is too expensive. You'll have less negotiating power if you buy at the top of your price range. If you're house-rich and cash-poor, you're shorting yourself in other ways.
  • Rate shop by talking to different mortgage lenders to compare interest rates based on your qualifications as a borrower.
  • Get a mortgage preapproval before you put in an offer. You will be viewed as a more serious buyer and can list fewer contingencies.
  • Find a real estate agent that puts you at ease. In addition to finding an agent that has a fair commission rate, it's important that you find a representative who is flexible enough to meet your needs as a buyer.
  • First-time home buyers should work with a real estate agent and a loan officer to navigate the process and help with document organization. Real estate agents will offer support and insight in the buying and negotiating process, and loan officers will be able to help you look into all of the best mortgage options based on your qualifications.
  • Don't talk yourself into buying just any home. Wait for the right one to come along if certain qualities are important to you. Sign up for alerts that will ping you about new listings that meet your expectations, and ask your real estate agent to keep their eyes peeled, too.
  • Avoid mortgage insurance. Save 20% of the home's purchase price as a down payment. But if you can't, don't forget that there are other solutions, such as home co-investing, designed to make it easier for home buyers with a lower down payment to get into their dream home.