The government has expanded its low- and no-down payment mortgage coverage, and several bills in Congress propose grants and federal tax credits to first-time home buyers.

This Mortgage 101 guide explains concepts, strategies, and action plans you’ll need to stop renting and start owning.

What Is a Mortgage?

A mortgage is a loan used to finance a home.

to buy homes. Mortgages are popular because few home buyers have hundreds of thousands of dollars in their bank account.

The majority of mortgages pay off over 30 years.

Before we go deep into your mortgage education, let’s review a few key mortgage terms:

• Lender: the company that funds your mortgage loan
• Borrower: the person receiving the mortgage loan — you!
• Down payment: the amount of cash you bring to the transaction. Down payments may be described in dollar terms (e.g., $10,000) or as a percentage of the home’s sale price (e.g., 3 percent)
• Loan amount: the amount of money still owed on your mortgage loan. Loan amounts are sometimes called principal.
• Loan term: the amount of time you have to pay back your loan. Loan terms are expressed in years (e.g., 30 years, 15 years) or months (e.g., 360 months, 180 months).
• Interest rate: The borrowing rate on your mortgage.
• Fannie Mae & Freddie Mac: the two government organizations that support most first-time home buyer mortgages.

How Does a Mortgage Work?

Mortgage loans are like other loans in your life. You borrow some amount, you get an interest rate at which to pay it back, and there’s a schedule to make your monthly payments.

Mortgage payments are due on the first of each month. Lenders grant a 15-day grace period, then late fees are assessed. Many homeowners use their lender’s autopay features to prevent late payments.

You don’t need a bank account or a pre-existing banking relationship to get a mortgage loan. You can get a mortgage loan at any of the following places:

• Local retail bank branches, such as Chase or Wells Fargo
• Neighborhood mortgage companies, such as Cross Country Mortgage or Caliber Home Loans
• Online mortgage lenders such as Rocket Mortgage or Homebuyer.com / Novus Home Mortgage

Learn more about the differences between mortgage lenders, brokers, and banks.

It’s always good to start your application early — even before you find your first home.

Studies show that home buyers who learn about mortgages get lower rates than those who do not. Educated buyers often pay fewer closing fees, too.

5 Types of Mortgages

The U.S. government created the modern mortgage market in the 1930s. Today, there are five basic mortgage types, each with different qualifying rules.

• Conventional mortgages
• FHA mortgages
• USDA mortgages
• VA mortgages
• Portfolio mortgages

Let’s look at all five options.

Conventional Loans

Conventional loans are usually best for home buyers with salaried or hourly income, some amount of money saved up, and good credit. Conventional loans require a minimum three percent down payment. For smaller down payments, private mortgage insurance (PMI) may be required.

Eighty-one percent of first-time home buyers use conventional mortgage loans, so you probably will, too.

FHA Loans

FHA loans are a fallback option for first-time buyers who fall short of the conventional loan requirements. FHA mortgages allow down payments as low as 3.5 percent and credit scores down to 500.

Approximately 10 percent of first-time home buyers use FHA mortgage loans. They’re popular with home buyers who purchase multi-unit homes for house hacking.

VA Loans

VA loans are loans backed by the Department of Veterans Affairs. Created as part of the G.I. Bill in 1944, VA loans are available to current and past members of the U.S. military. VA loans don’t require a down payment nor mortgage insurance.

from standard VA closing costs.

USDA Loans

USDA loans are guaranteed by the U.S. Department of Agriculture and designed to promote homeownership in rural and low-density areas. USDA loans are 100 percent mortgages with subsidized interest rates. Home buyers must be of modest means to use the program and purchase a modest home for the area.

Portfolio Loans

Portfolio loans are loans that mortgage lenders make and hold on their balance sheets (i.e., in their portfolios). Government groups don’t back portfolio loans so mortgage guidelines vary by lender. Each lender makes its own rules. Jumbo mortgages are a type of portfolio loan. In general, getting a portfolio loan requires better-than-average income and credit.

See home loans for first-time buyers.

How Do Mortgage Rates Work?

Twelve factors make up your mortgage rate.

Some factors are within your control, such as the state in which you buy your home and your FICO credit score. Other factors are outside your control, such as Wall Street’s attitude on mortgage markets.

The starting point for all mortgage rates is a Wall Street instrument called mortgage-backed securities (MBS).

Mortgage-backed securities are bonds that trade Monday through Friday, from 8:00 AM to 4:00 PM ET. As bond prices change, so do mortgage rates, and bond prices are unpredictable.

However, mortgage bonds are denominated in U.S. dollars, so there are two basic rules:

1. When the U.S. dollar is strong, mortgage rates tend to fall
2. When the U.S. dollar is weak, mortgage rates tend to rise

During periods of low inflation and political stability, the U.S. dollar tends to be strong. That’s good for U.S. mortgage rates. Economic instability, on the other hand, is not.

Mortgage lenders reserve the best mortgage rates for home buyers with high-tier credit scores — 740 and higher. Then, for every 20 points that your credit score drops, mortgage rates often edge higher.

Your mortgage rate is also affected by:

• The state you buy your home in
• The size of your mortgage loan
• The number of years in your loan term

How Often Do Mortgage Rates Change?

The price of mortgage-backed bonds, which are securities bought and sold on Wall Street, determine mortgage rates. Mortgage rates can change anytime the mortgage-backed bond market is open.

Mortgage rates change at least once daily — at the market open. Rates change again when markets are volatile. Several times in the last few years, mortgage rates changed five times in one day, which is challenging to navigate.

When mortgage rates change, open offers for mortgage rates expire. A lender won’t give you yesterday’s rates like a stockbroker won’t give you yesterday’s stock price.

So, when you get a mortgage rate offer you’re comfortable with, lock it.

What Is The Difference Between A Fixed-Rate Mortgage and an Adjustable-Rate Mortgage?

Over the life of the loan, the interest rate on a fixed-rate mortgage doesn’t change — the interest rate on an adjustable-rate mortgage (ARM) can.

For many home buyers, adjustable-rate mortgages are inappropriate. Hence, fewer than five percent of buyers used ARMs over the last ten years.

Here’s how most ARMs work.

• Your mortgage is assigned a teaser interest rate over the first set of years, usually five.
• After the teaser period ends, your interest rate adjusts annually based on a predetermined formula.
• After 30 years, the principal is paid in full, and no more payments are due.

ARMs may show savings in their first few years, but those savings can change once the teaser period ends.

Rules govern ARM interest rates. They can only move a few percentage points per year and can never move more than six points in their lifetime.

What Is a Mortgage Pre-Approval?

A mortgage pre-approval is a dress rehearsal for your actual mortgage approval. Pre-approvals serve three critical functions.

1. They help you determine how much house you can afford.
2. They show home sellers you’re qualified to purchase their home.
3. They reveal potential improvements in your application to get you a better mortgage rate and terms.

Getting pre-approved for a mortgage is different from getting pre-qualified for one.

When you get pre-approved, a mortgage lender reviews your income, assets, and credit report as if you were purchasing an actual home at a specific sale price.

Mortgage pre-approvals are as close as possible to an actual mortgage approval without making an offer. By contrast, pre-qualifications are not close at all.

Pre-qualifications are like credit card offers in your mailbox. There are no verifications or little quality control. Pre-qualifications are worthless PDFs, and sellers don’t accept them as evidence that you’re credit-worthy.

What Do You Need for Mortgage Approval?

Getting a mortgage approval is a cinch after you’re pre-approved.

The specific items you’ll need for your approval will vary based on your mortgage type and how you’re employed. For example, conventional mortgages may ask for two recent pay stubs to show evidence of income. Portfolio mortgages may ask for copies of your federal tax returns.

If you’re salaried, your lender may call your employer to verify your employment. If you’re self-employed, you may be asked to provide an updated profit-and-loss statement with evidence you’re still in business.

If you meet the following criteria, your mortgage approval will usualy be quick and inexpensive.

• You’re a first-time home buyer
• You’re buying a home from a person (i.e., not a builder or corporation)
• You’re salaried at your job and don’t own the company
• You’re making a down payment of at least three percent
• You have a decent history of paying your bills and rent on time

Your mortgage approval may require evidence of assets, landlord contact information, recent W-2s, tax returns, and more if these trait don’t describe you.

Your mortgage lender will make a mortgage approval checklist for you. Most mortgage loans are approved in a few days.

What Is a Mortgage Loan Limit?

Mortgage loan limits are the upper bounds at which government-backed mortgage groups back U.S. buyers.

Loan limits vary by U.S. county and are expressed in dollar terms. Mortgage loan limits are lower in areas where home prices are more affordable. They’re higher in areas with higher home prices.

They also vary by home type.

A one-unit home such as a detached single-family residence or condominium will have a lower mortgage loan limit than a 2-unit home in the same state and county.

Nationwide, there are 3,233 designated counties. The 2025 conventional mortgage loan limits are:

• 1-unit home: $806,500
• 2-unit home: $1,032,650
• 3-unit home: $1,248,150
• 4-unit home: $1,551,250

The remaining five percent of counties are High-Cost Areas. Loan limits can range as much as 25 percent higher in cities including San Francisco, Los Angeles, and New York City.

• 1-unit home: $1,209,750
• 2-unit home: $1,548,975
• 3-unit home: $1,872,225
• 4-unit home: $2,326,875

Mortgage loan limits are reviewed and updated annually, usually during the last week of November. New loan limits go into effect on January 1 each year.

Mortgage loans exceeding local loan limits are known as jumbo loans. These fall into the category of portfolio mortgages.

What Credit Score Is Needed To Buy a House?

You can buy a home with no official credit rating. Still, the best mortgage rates are for buyers with high credit scores and an excellent financial history.

Mortgage credit scores are different from auto loan credit scores or Credit Karma scores. Mortgage credit scores are based on an algorithm called the model, which is why lenders refer to your score as a FICO.

Your FICO score is a probability statistic scored from 300-850. The higher your score, the more likely you will make on-time payments for the next 90 days. And, if you know how the system works, you can boost your score to get a lower rate.

Your credit score considers five components:

• Your history of making payments on time
• How little of your credit you’re utilizing
• The types of credit you’ve managed in your lifetime
• The number of years you’ve managed credit
• Whether you recently sought out new credit

Payment history and credit utilization account for 65 percent of your overall score. The best way to boost your credit is to pay your bills on time and keep your credit usage down.

Your credit behavior changes will reflect in your score after 30 days, then again after six months. You can increase your score by 100 points or more with diligent effort. Raising your score one hundred points can lower your mortgage rate by one percentage point or more.

Mortgage FAQs

Now that you’ve learned the mortgage basics, here are answers to other common questions:

What salary do you need to qualify for a mortgage?

Mortgage loans are approved considering affordability and don’t have specific salary requirements.

In general, you may qualify for a mortgage so long as you’re not obligating more than 40-45 percent of your household’s monthly gross income to debt. There are exceptions to this guideline.

What are good mortgage terms?

The 30-year mortgage term is the most popular choice for affordable monthly payments. A 15-year term is also suitable for long-term financial savings and a lower interest rate.

Consult with a mortgage lender to determine which loan term best fits your situation and financial goals.

What is the difference between pre-qualified and pre-approved?

Mortgage pre-qualification isn’t as desirable as pre-approval. Pre-approvals include a credit check and prove your buying power to sellers. Pre-qualifications can provide insight into your financial situation but won’t help you buy a house.

Neither status is a guarantee of loan approval.

What is mortgage insurance?

Mortgage insurance protects your lender if you’re unable to meet contractual obligations. Mortgage insurance may be required depending on your loan choice, down payment, and lender.

There are four types of mortgage insurance available to choose from. Contract length and payment options vary by contract.

What’s the difference between a mortgage cosigner and co-borrower?

A co-borrower owns an equal part of the property along with the buyer. Cosigners hold no homeownership. Learn more about using a mortgage cosigner to buy a home.

A Longer Definition: Mortgage-Backed Securities

Mortgage-backed securities (MBS) are investment products created by bundling mortgages from homeowners and then selling shares of the bundle to investors worldwide. Also known as mortgage-backed bonds, mortgage-backed securities directly influence current mortgage rates through their relationship with the supply and demand of mortgage funds.

When lenders make mortgages for home buyers and refinancing homeowners, they often sell them to government-backed agencies like Fannie Mae and Freddie Mac, who pay cash to the lenders for the loans. When lenders get paid, it re-supplies their reserves, which allows them to make more mortgages to first-time home buyers and others.

Meanwhile, Fannie Mae, Freddie Mac, and other buyers of mortgages group the loans they buy into bonds that are backed by the mortgages and sold to institutional investors, including pension funds, large companies, and .

MBS investors are buying bonds. A given bond’s interest rate is the average of the mortgage rates inside them. In this way, mortgage-backed securities affect U.S. mortgage rates.

Interest rates may increase when demand for mortgage-backed bonds is low, or investors might stop investing in mortgage-backed bonds. Conversely, interest rates can drop when demand for mortgage-backed bonds is high.

This is part of how the Federal Reserve and mortgage rates are linked, if only indirectly.

Mortgage-Backed Securities: A Real World Example

Imagine a scenario where inflation pressures are falling, spurring high demand for mortgage bonds from worldwide investors, including pension funds and insurance companies. As demand for mortgage bonds rises, the price of mortgage-backed bonds rises because demand is growing faster than supply.

Bond prices and bond yields move in opposite directions, so as prices rise, mortgage rates fall, which makes homeownership more affordable for first-time home buyers and others.

Frequently Asked Questions About Mortgage-Backed Securities

How do mortgage-backed securities affect mortgage rates?

Mortgage-backed securities affect mortgage rates through their impact on the supply and demand of mortgage funds. High demand for mortgage-backed securities lowers their yield, lowering mortgage rates.

Why are mortgage-backed securities important for the housing market?

Mortgage-backed securities are important because they provide liquidity to the housing market, allowing banks to issue more mortgages. They also influence mortgage rates, which directly impact homebuying and refinancing activities.

Can changes in mortgage-backed securities prices impact the economy?

Yes, changes in mortgage-backed securities prices can significantly impact the economy, mainly through their influence on mortgage rates and, consequently, the housing market.

Who benefits from lower mortgage rates due to high demand for mortgage-backed securities?

Homebuyers and homeowners looking to refinance benefit from lower mortgage rates resulting from high demand for mortgage-backed securities, making borrowing more affordable.

What role did mortgage-backed securities play in the economic crisis of 2008?

The economic crisis of 2008 was partly fueled by the proliferation of mortgage-backed securities backed by higher-risk mortgages. When these mortgages defaulted at a higher-than-expected rate, it led to significant losses for MBS investors and contributed to the collapse of major financial institutions.

Why does the Federal Reserve buy mortgage-backed securities sometimes?

The Federal Reserve buys mortgage-backed securities to influence the economy. By purchasing MBS, the Fed helps to lower mortgage interest rates, which supports the housing market and the broader U.S. economy.

A Longer Definition: Conventional Mortgage

Conventional mortgages, broadly, are mortgages backed by government agencies Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are the two mortgage entities that make up the Federal Housing Finance Agency.

Conventional mortgages are split into two categories: Conforming and Non-Conforming.

A conforming mortgage is a conventional mortgage that conforms to the FHFA’s published mortgage guidelines and falls within conforming mortgage loan limits for the area. After a conforming mortgage is originated for a home buyer, the mortgage is routed through Fannie Mae or Freddie Mac and then purchased on Wall Street as mortgage-backed securities.

A non-conforming mortgage is a conventional mortgage that exceeds loan mortgage loan limits and, therefore, cannot be purchased by the FHFA. Non-conforming mortgages are commonly called jumbo mortgages.

The FHFA modifies conforming mortgage loan limits annually to match changes in its House Price Index, a home-value tracker that measures home prices in more than 3,100 local markets.

The current conforming loan limit for single-family homes, including detached homes, townhomes, and condos, is $806,500 and ranges up to in high-cost areas of the country.

3,442,038 people used conventional mortgages to buy a home last year. Other conventional mortgage statistics include:

• The conventional mortgage market share was 69.70%
• The average conventional loan size was $402,642
• 98.6% of home buyers using a conventional mortgage purchased a 1-unit home

Conventional mortgages are commonly available with 30-year, 20-year, 15-year, and 10-year fixed-rate options and adjustable-rate options, including 3-year, 5-year- and 7-year ARMs.

Who Qualifies for a Conventional Mortgage?

To qualify for a conventional mortgage, first-time home buyers must meet Fannie Mae’s or Freddie Mac’s eligibility standards, which are nearly identical for buyers of 1-unit homes, including detached houses, condominiums, townhomes, and row homes.

• Home buyers must make a down payment of at least 3 percent
• Home buyers must have a verified source of income
• Home buyers must have a minimum credit score of 620
• Home buyers may not have a recent foreclosure, short sale, or bankruptcy
• The mortgage loan size must be within local mortgage loan limits
• Homes must be structurally sound and habitable

In rare scenarios, a home buyer will be approved for a conventional mortgage despite not meeting official mortgage standards.

Conventional mortgages require home buyers to have a social security number or valid Individual Taxpayer Identification Number (). Permanent and non-permanent resident aliens are eligible for conventional mortgages at the same terms as U.S. citizens.

Conventional mortgages are the most widely used mortgage program nationwide. More home buyers use conventional mortgages than all other mortgage types combined.

Chart: Conventional Mortgage Rates Since 2000

Popular Conventional Mortgage Programs

Standard Conventional Mortgage: Good for Home Buyers With 5% Down Or More

The standard conventional mortgage is the no-frills mortgage loan most home buyers use. It’s the default mortgage option for home buyers who cannot use a VA mortgage because they never served in the military or a USDA mortgage because they’re not buying in an area on the USDA map.

The most common conventional mortgage is the 30-year fixed-rate mortgage. The typical first-time home buyer makes a downpayment less than twenty percent.

HomeReady: Good for Low-To-Moderate Income Home Buyers

HomeReady is a Fannie Mae affordable homeownership program for low-to-moderate-income households. HomeReady lets first-time home buyers make a minimum 3 percent downpayment and gives them reduced private mortgage insurance premiums and discounted mortgage rates.

HomeReady is the de facto low-down-payment conventional mortgage loan. The minimum credit score required is 620.

Learn more about the Fannie Mae HomeReady mortgage.

Home Possible: Good for Home Buyers With Boarder Income

Home Possible is a Freddie Mac affordable mortgage program for low-to-moderate-income households.

Home Possible is similar to the Fannie Mae HomeReady product: it allows a 3 percent down payment and offers reduced private mortgage insurance and discounted mortgage rates. However, the Freddie Mac version allows boarder income for qualifying purposes and enforces a minimum 660 credit score.

Learn more about the Freddie Mac Home Possible mortgage.

Conventional 97: Good for Home Buyers Making A Minimum Downpayment

The Conventional 97 mortgage, also known as the 97% LTV Standard, is the generic low-downpayment conventional mortgage.

Conventional 97 is available to first-time home buyers who purchase and plan to occupy their one-unit homes, including houses, condominiums, and townhomes, and who attend a homeownership education class.

Learn more about the Conventional 97 mortgage.

HomeStyle Renovation: Good for Home Buyers Making Major Repairs

The Fannie Mae Homestyle Mortgage is a mortgage that lets home buyers purchase a home and add the cost of repairs, improvements, or renovations to the loan’s beginning principal balance. HomeStyle mortgage rates are typically higher than other conventional mortgage rates.

Private Mortgage Insurance (PMI) for Conventional Mortgages

Private mortgage insurance (PMI) is to conventional mortgages what FHA mortgage insurance is to FHA mortgages: an insurance policy that pays mortgage lenders when a homeowner has a mortgage default from not making payments.

It’s customary for mortgage lenders to order private mortgage insurance on behalf of a home buyer. Policies are primarily identical in price and coverage, which is based on traits including down payment size, credit score, size of down payment, and mortgage program.

The typical private mortgage insurance fee is between 0.25 and 1.00 percent per year.

Private mortgage insurance rates are lower for home affordability mortgage programs like HomeReady and Home Possible than a standard conventional loan. Payments are also lower for fixed-rate mortgages compared to adjustable-rate mortgages.

Generally, a conventional mortgage requires private mortgage insurance until the homeowner’s equity reaches twenty percent. Therefore, for many first-time home buyers, PMI goes away quickly.

Most first-time buyers can cancel PMI in fewer than three years.

Here’s why: The value of a U.S. home goes up approximately 7 percent per year, and with every mortgage payment, a homeowner’s PITI reduces their mortgage balance. Therefore, a home buyer who starts with five percent down would need roughly 27 months to reach 80% loan-to-value.

It’s common for first-time home buyers to delay buying a home because they want to avoid paying private mortgage insurance.

This is one of the .

Common Questions About Conventional Mortgages

What are this year’s conforming mortgage loan limits?

The FHFA set this year’s conforming mortgage loan limits at $806,500 for 1-unit homes, ranging up to $1,209,750 in high-cost areas. Search mortgage loan limits for every USPS address at /mortgage-loan-limits.

Can I still get a conventional mortgage if I don’t have a 20% down payment?

Yes, home buyers can use conventional mortgages with a down payment of less than twenty percent. Popular low-downpayment mortgages include HomeReady and Home Possible.

Can I get a conventional mortgage if my credit score is low?

Yes, conventional mortgages are available to home buyers with credit scores of 620 or higher. Home buyers with lower credit scores will generally be assigned higher mortgage rates. If your credit score is too low to get the mortgage rate you want, compare it to an FHA mortgage.

What happens if I need a loan larger than my local mortgage loan limit?

When a loan amount exceeds the FHFA’s local conforming limits, the loan becomes a non-conforming or jumbo loan, which may have different mortgage guidelines and interest rates.

There is too much room for error to get it perfect. Home buyer education can prepare you for your first home-buying journey, but a homebuyer curriculum only gets you so far. 

So, we’ve prepared two lists to help you be a better home buyer.

1. A list of tips for first-time buyers
2. A list of common first-time home buyer mistakes (this article!)

Consider bookmarking this page. It lists the most common mistakes first-time buyers make that delay or derail their American Dream of homeownership.

Let’s get going.

1. Don’t Assume You Need A 20 Percent Downpayment

You don’t need to make a 20 percent down payment to buy your first home. 

According to the Consumer Financial Protection Bureau, the typical first-time home buyer makes a 6 percent down payment, and only a tiny percentage of first-time buyers put twenty percent down or more.

You can buy a home with a small down payment. There are more than a dozen home loans for first-time buyers that allow down payments of 5 percent or less.

Instead of making the largest down payment when you buy your first home, make the most sensible down payment instead. 

2. Don’t Wait To Start Saving For A House

Ben Franklin famously said: “Money makes money. And the money that money makes, makes more money.”

It’s a quote about compounding interest, which is interest earned on prior interest earned. Compounding interest grows money quickly.

One effective way for buyers to build their savings faster is:

1. Open a high-yield interest savings account earmarked home buying
2. Make additional automatic deposits each month
3. Don’t make withdrawals until you buy your home

As the Philadelphian advises us: set your home savings goals early. The longer you save, the more money you make.

3. Don’t Forget To Save For Closing Costs

Buying a home requires fees and taxes. Even when you do a 100% mortgage, such as a USDA loan or VA loan – there are costs beyond the property’s purchase price.

Here’s a sample of closing costs you might see at your settlement:

• Loan origination fees
• Title insurance and settlement fees
• Property taxes
• Escrow fees
• Transfer stamps
• Survey fees

There are even costs when you use a no-closing-cost mortgage because move-in day costs money. Moving companies, home repairs, and household appliances aren’t free.

Have a plan to have some cash.

4. Don’t Buy More Home Than You Can Afford

Every successful home purchase starts with a mortgage pre-approval.

A mortgage pre-approval is a dress rehearsal for your mortgage application. It tells you that your mortgage will be approved and how much home you can afford to buy.

How much home you can buy, however, is different from how much you should buy.

It’s a mistake to let the bank set your budget.

The better pre-approval approach is to determine how much you’re comfortable paying each month, then ask your lender to pre-approve you for that exact payment.

It’s impossible to go over budget when you start with your payment instead of your price.

5. Don’t Skip Checking Your Credit Report

Most home buyers have never seen their mortgage credit score, which is different from the free credit reports available from services like freecreditreport.com.

Mortgage credit reports are specific to the mortgage industry.

The good news is that mortgage pre-approvals include a credit score check and a complete borrowing history. As part of your pre-approval, ask your lender to see your credit report. Review it for errors and make improvements. You can also fix your credit score with just a little bit of work.

The best mortgage deals go to buyers with great credit.

6. Don’t Only Speak To One Mortgage Lender

, most first-time home buyers talk to one mortgage lender only – even as they admit comparison shopping will save them money.

So, why don’t consumers comparison shop? says it’s because of irrational consumer behaviors. 

Thaler’s work says home buyers don’t comparison shop because consumers, in general:

• Search too little for solutions
• Are slow to switch from prior choices
• Become confused by complex alternatives

To avoid this mistake, act rationally. Talk to multiple mortgage companies. Give multiple mortgage applications. Comparison shop to get your best deal.

7. Don’t Ignore First-Time Home Buyer Assistance Programs

First-time home buyers can access more than 800 federal, state, and municipal down payment assistance programs to help buy a home.

There are 5 main types of first-time home buyer assistance:

1. Down payment assistance
2. Closing cost assistance
3. Cash grants for buyers
4. Temporary interest rate reductions
5. Interest-free mortgages

Some first-time home buyer programs are saved for lower-income buyers and buyers from under-represented socio-economic groups. Others are first-come, first-served with no restrictions at all.

Don’t miss a chance for free homeowner money. Check with your local county website for housing assistance programs and visit the government’s to find other state and national programs.

8. Don’t Confuse Pre-Qualification and Pre-Approval

A mortgage pre-qualification is not a mortgage pre-approval. First-time buyers get burned by not knowing the difference.

Pre-qualification

A ballpark estimate of how much home you can buy based on a verbal review of your finances

Pre-approval

An everything-but-the-house mortgage approval based on verified finances 

The difference between a pre-qualification and a pre-approval is that a pre-qualification has little value, and a pre-approval has high value.

Mortgage pre-approvals make a reliable framework for a purchase. Pre-approvals use income, assets, and credit score verifications to determine how much home a first-time buyer can buy, at what interest rate, and with what closing costs.

Pre-qualifications do none of those things.

9. Don’t Hire The First Real Estate Agent You Meet

Pay attention to who you hire to represent you.

A recent report from the  asked home buyers what they want most from a real estate agent. 

The top 3 answers showed buyers want real estate agents to help them:

1. Find the right home
2. Explain the contracts and paperwork
3. Negotiate great terms

Let’s also note: these are the three most important skills of all great agents – in real estate, sports, Hollywood, or anywhere else. First-time buyers shouldn’t just settle for the first agent they meet.

Great real estate agents understand your local market. They’ve toured many of the homes, submitted offers to purchase for other buyers, and negotiated sales contracts according to local custom.

When you work with a great real estate, you get a better house and pay a better price.

If you cannot tell the difference between a great agent and a bad one, ask a trusted friend for a referral.

10. Don’t Treat Your First Home As An Investment

Some of history’s greatest fortunes have come from owning property. But, as a first-time home buyer, avoid the approach of the real estate tycoon.

Instead, think practical.

When you’re a first-time home buyer, your new home will be your residence. You will live there and it will be the center of your life activities. So, buy a home that meets your household needs today.

Also, the typical homeowner moves . It’s unlikely this will be your forever home. You can expect to build equity and wealth in your home, but you may want that money to move up to your next home.

The happiest homeowners live in homes that meet their financial and emotional needs:

• Their monthly payment is manageable and low-stress
• The commute to work is brief and without traffic
• Their neighborhood is a community with friendly residents
• The local school system is highly rated and well-funded
• There are parks nearby for running, biking, and outdoor activity

Remember that a good home will appreciate. A great home you will appreciate. 

11. Don’t Skip The Neighborhood Tour

Your neighborhood shapes your homeowner experience.

When you purchase a home, you inherit its property line, neighbors, and community. The best and happiest home buyers study up on their prospective homes before they write a contract.

Recognize that it’s hard to meet neighbors during open houses and home tours, so try these other home-buying reconnaissance tactics.

• Drive through during the weekend and talk to people
• Drive through on a weekday night and talk to people
• Test-drive your new work commute on a weekday morning
• Look for community events, including Meet Your Neighbors and block parties
• Visit the closest grocery store on a Sunday afternoon

You’ll spend a lot of time in your new neighborhood. Get to know it ahead of time.

12. Don’t Overshare at the Open House

Sometimes, it’s best to play it quiet – especially at the open house.

Open houses are events where for-sale properties are opened for public touring. Home buyers can use open houses to walk through a home and get a feel for how its space works.

The seller’s agent is usually on-site to answer questions at an open house. The smartest home buyers will ask questions while offering up little information about themselves:

• What do you know about this neighborhood?
• Why is the seller moving?
• What is the seller’s timeline?
• Are the home appliances up-to-date?
• Have there been significant repairs to the home?

Every piece of personal information shared is an opportunity to weaken your negotiation.

When you fawn over the home’s incredible curb appeal, for example, or its status as a move-in ready home, it may signal the seller that you’re willing to overpay. Similarly, when you talk about buying a home with bad credit, the seller may think you’re unqualified. 

You have twice as many ears as mouths. When you go to an open house, remember that proportion. Listen twice as much as you speak.

13. Don’t Skip The Home Inspection

A good inspection will save you tens of thousands of dollars in home repairs, systems breakdowns, and insurance deductibles, so don’t skip it.

A home inspection examines a home, its systems, and appliances performed by a licensed professional. Home inspections cost $300-800 to commission, and  require at least one minor or major repair.

Order a home inspection within seven days of going into contract. Select an experienced home inspector for the type of home you’re buying, one who understands your home’s systems, including heating, cooling, plumbing, and electrical.

During the home inspection, an inspector will share maintenance tips and home-keeping advice specific to your home. They may also share that your home requires a new roof or its foundation has creaks or leaks.

The inspector’s findings can be the basis for re-negotiating the contract for repairs, discounts, or cancellations. The money spent is worth it.

14. Don’t Forget To Check For USDA-Eligible Homes

Before committing to a down payment, check your eligibility for the 100% USDA mortgage.

The USDA mortgage is a no-money-down loan backed by the U.S. Department of Agriculture (USDA). The loan’s official name is the Section 502 mortgage, named for the section of the , which outlines the program’s rules and regulations.

The USDA loan is for modest buyers of modest homes in non-urban parts of the nation. USDA mortgages tend to be less expensive than other types of mortgages, and when mortgage rates drop, USDA loans can be refinanced inexpensively. 

The main benefits of a USDA mortgage include:

• No down payment is required to buy a home
• Lower-than-average mortgage rates, based on HMDA data
• Flexible standards for buyers with less-than-perfect credit

USDA mortgages are for primary residences. Loans are available with the 30-year fixed-rate option only.

Click here to search the USDA eligibility map.

15. Don’t Skimp On Your Cash Emergency Fund

Life happens unexpectedly, and first-time home buyers without an emergency fund are at higher risk of foreclosure.

Foreclosure is the legal process of a lender repossessing a home after non-payment and then selling it to pay off its mortgage. According to , foreclosures affect approximately 30,000 homeowners annually.

The three most common reasons for foreclosure are:

1. Death of a household wage-earner
2. Illness preventing a wage-earner from working and earning income
3. Divorce, which usually lowers the wages earned within a household

Households with emergency funds often keep their homes in a crisis. Households without emergency funds often don’t.

Before you save for a down payment, save for an emergency fund. Have three months of mortgage payments in your account, at minimum. Six or twelve months is even better.

Life rarely moves in straight lines. Emergency funds protect your life.

16. Don’t Ignore The Rules Of The HOA 

When buying in a homeowners association (HOA), you lose some of your household freedoms.

Homeowners associations are legal entities that govern planned community, condominium, and townhome developments. HOAs enforce rules and regulations for properties and common areas. 

The stated goal of HOAs is to manage shared amenities, support property values, and improve the quality of life for its residents.  Americans live in HOA communities, and membership is mandatory.

Rules vary by community and often include the following:

• Make regular HOA membership payments, known as HOA dues
• Maintain the exterior and curb appeal of your home
• Limit the number of automobiles parked at your home
• Refrain from displaying signs on your property
• Maintain regular noise levels

Violating HOA rules can result in fines, penalties, and, in extreme cases, legal action.

First-time buyers should review an association’s governing structure before purchasing an HOA-governed property. Ensure the rules, fees, and restrictions align with your lifestyle and expectations.

Questions Readers Ask About Buying Their First Home

I’m ready to start looking for houses. What do I do first?

The first step of every successful home search is getting mortgage pre-approved. A mortgage pre-approval tells you how much home you can purchase and what to expect for your payment. Getting pre-approved also provides you with a Verified Approval Letter, which shows home sellers that you’re a serious buyer. 

Do first-time home buyers have to make a down payment?

No, not all first-time home buyers have to make a down payment. Multiple mortgage programs, including the VA, USDA, and Doctor Loans for Physicians, allow no money down for eligible buyers. 

Government assistance programs for first-time buyers, such as down payment assistance, forgivable loans, and cash grants for first-time buyers, can help make loans 100% financed.

How much down payment does the typical first-time buyer make?

According to the National Association of REALTORS®, the typical first-time home buyer makes . The median down payment for all home buyers is twelve percent.

How do I prove that I’m a first-time home buyer?

There are several answers to “What is a first-time home buyer?” The most common interpretation used by lenders is that a first-time buyer is any person who has not owned the home they’ve lived in for the last 36 months. 

Most first-time home buyer programs use the 36-month definition.

This article tracks housing and first-time home buyer bills in Congress. None of the programs featured are passed into law. This article is for informative and planning purposes only.

Take advantage of today’s mortgage rates without making a 20 percent down payment.

Along with low-down payment mortgages and no-down payment options, such as the USDA mortgage and VA mortgage, there are 16 first-time home buyer grants and programs that make buying your first home more affordable and accessible.

What is a First-Time Home Buyer Program?

First-time home buyer programs are mortgage loans and benefits that help renters achieve their American Dream of homeownership.

First-time buyer programs are broadly grouped into 3 categories:

1. Home affordability mortgages from a mortgage lender
2. Cash grants and incentives from a public or private organization
3. Stimulus programs from Congress or a government agency

First-time buyer programs expand homeownership opportunities to new groups of people. They’re particularly beneficial to buyers for whom making a big down payment or paying real estate fees is cost-prohibitive.

Eligibility may be based on job title, household income, or status as a first-time buyer. Programs are typically inclusive, lenient, and offered at low mortgage rates.

First-Time Home Buyer Programs: Affordable Mortgages

An affordable mortgage is a government-backed mortgage with relaxed down payment requirements, reduced mortgage insurance fees, or discounts for qualified buyers.

Our analysis of mortgage statistics shows more than 1 million first-time home buyers use affordable mortgages each year. Here are the programs first-time buyers use.

1. HomeReady: Low Down Payment Mortgage

HomeReady is a 3-percent down payment mortgage that offers reduced mortgage rates and lower loan costs for low- and moderate-income home buyers.

HomeReady is a modified conventional mortgage, backed by Fannie Mae. It requires a minimum 620 credit score and allows a debt-to-income ratio of up to 50%. Buyers can use it to finance Accessory Dwelling Units and may use Cannabis industry income as part of their application.

Home buyers using HomeReady to purchase a property in default can receive an extra $500 closing cost credit and up to 3 percent toward their mortgage closing costs via Fannie Mae’s HomePath foreclosure sale program.

2. Home Possible: Low Down Payment Mortgage

Home Possible is a 3-percent down payment mortgage similar to HomeReady. It offers low- and moderate-income home buyers reduced mortgage rates and loan fees and is available as a fixed-rate or adjustable-rate loan. 

Home Possible requires eligible buyers to have a 660 credit score while allowing up to 50% DTI. Home Possible is based on a Freddie Mac conventional mortgage.

Compare HomeReady and HomePossible side-by-side.

3. Conventional 97 / Standard 97 LTV: Low Down Payment Mortgage

Conventional 97 is a 3-percent down conventional mortgage for home buyers who are not low- and moderate-income earners. The program is sometimes called the Standard 97 LTV, which is shorthand for a “standard conventional 97% loan-to-value mortgage”.

Program eligibility requires a 620 credit score, a 50% debt-to-income ratio, and buyers must meet the definition of a first-time home buyer.

The Conventional 97 is available as a fixed-rate mortgage for 1-unit properties only, which includes single-family homes, eligible condos, and townhomes.

4. FHA Mortgage: Low Down Payment Mortgage

The FHA mortgage is the original affordable housing mortgage loan.

Created as part of the in 1934, the FHA loan is an inclusive 3.5% down payment mortgage backed by the Federal Housing Administration (FHA). FHA mortgage guidelines are lenient with credit scores, income sources, and credit history.

The FHA mortgage is popular with the “house hacker” crowd for its comparatively low mortgage rates for multi-unit homes.

Home buyers using an FHA-backed mortgage in 2025 are limited to loan sizes of $498,257 for 1-unit homes in most parts of the country, and $1,149,825 in high-cost areas.

Find your local FHA mortgage loan limit here.

5. USDA Mortgage: No Down Payment Mortgage

The USDA mortgage is an affordable housing mortgage program for buyers in non-urban communities. According to the USDA eligibility map, 91% of the United States land mass qualifies as non-urban.

The U.S. Department of Agriculture backs USDA mortgages.

USDA loans do not require a down payment, and buyers using the USDA mortgage average the smallest down payment of all government-backed loan types.

Homebuyer.com’s collection of mortgage statistics shows the typical USDA mortgage is made at a loan-to-value of 97.76 percent, with mortgage rates averaging 24.7 basis points below comparable conventional home loans.

6. VA Mortgage: No Down Payment Mortgage

The VA mortgage is a home affordability loan program for active-duty military members, veterans of the armed services, and surviving spouses. The Department of Veterans Affairs backs the VA mortgage, available to buyers as fixed- or adjustable-rate mortgages in all 50 states.

VA mortgages require a minimum 580 credit score and never charge mortgage insurance. Eligible military buyers can use VA loans to purchase any residential property as a primary residence except for non-warrantable condos and co-ops.

7. The FHFA First-Time Home Buyer Mortgage Rate Discount: Discounted Rates

Since early-2023, the FHFA First-Time Home Buyer Mortgage Rate Discount is applied automatically to all mortgages for buyers meeting three mortgage criteria:

1. Meets the definition of a first-time home buyer
2. Uses a conventional mortgage of any kind
3. Earns a low- to moderate household income

Eligible first-time buyers get a mortgage rate discount of up to 1.75 percentage points off today’s mortgage rates, increasing a buyer’s home purchasing power by approximately 19 percent. Mortgage lenders apply the discount automatically, which varies by credit score, down payment size, property type, and loan program.

FHFA First-Time Home Buyer Mortgage Rate Discount

First-Time Home Buyer Programs: Cash Grants & Incentives

Cash grants are non-repayable gifts to first-time home buyers to help purchase their first home.

Mortgage lenders do not issue cash grants.

Home buyers should apply for cash grants with government and local organizations directly, which do a public good, show cash grants increase homeownership rates by 34 percent.

Here are some common first-time home buyer cash grants and buyer incentives available to home buyers today:

1. The National Homebuyers Fund: Forgivable Cash Grant

The National Homebuyers Fund is a non-profit public benefit corporation that sponsors home buyers with up to 5 percent of a home’s purchase price. In exchange for the organization’s cash grant, home buyers agree to live in their home as a primary residence for at least five years.

The National Homebuyers Fund cash grant is typically used together with a standard mortgage loan, such as a conventional, FHA, USDA, or VA home loan, as a five percent down payment. Buyers cannot apply directly for the National Homebuyers Fund grant – only a mortgage lender can do it. For a list of participating lenders, call (916) 444-2615.

2. Discounted Homes from HUD: Discounted Real Estate

The Good Neighbor Next Door Program (GNND) is a U.S. Department of Housing and Urban Development (HUD) program that sells repossessed homes to first-time home buyers at half-price. 

Good Neighbor Next Door is available to teachers, firefighters, law enforcement officials, and emergency medical technicians who want to live in the same community where they work.

Home buyers who want to buy a Good Neighbor Next Door property must search for homes on the HUD website, and apply for their mortgage through a HUD-approved lender.

3. Closing Cost Assistance: Cash Grants For Closing Costs

Closing cost assistance programs are incentive programs that pay up to 100 percent of a first-time home buyer’s closing costs, including title insurance fees, real estate transfer taxes, and mortgage discount points.

Closing cost assistance is handled outside of the mortgage approval sequence.

Home buyers searching for closing cost assistance programs can search the National Council of State Housing Agencies’ website at https://www.ncsha.org/about-us/about-hfas/ or perform a similar search through local homebuying programs at .

Eligibility criteria may be out-of-date and program funding may be expired, so check with each local agency before applying for a program.

4. Down Payment Assistance Programs (DPA): Cash Grants & Credits

Down payment assistance is a first-come, first-served cash grant to help make homes affordable.

Cash grants can range from $500 to $50,000 which buyers can apply to closing costs, discount points, and down payments on a home.

The most common form of down payment assistance is seller concessions, which is when a home seller pays some or all of a home buyer’s settlement fees. Seller concessions are negotiated by a buyer’s agent and included in a purchase offer agreement.

Other forms of down payment assistance include federal and local tax credits, which are automatically applied by the IRS, and forgivable grants for buying a home and living in it for a predetermined number of years, usually five.

5. Down Payment Loans: Discounted Mortgages

Down payment loans are loans made by non-profit and community organizations at ultra-low rates, used for a buyer’s down payment percentage. Interest rates for a down payment loan are often in the one-percent range and amortized over 30 years.

A $25,000 down payment loan at 1% would cost a home buyer $80 per month.

Some mortgage program guidelines disallow down payment loans, so check with your lender before applying. Your lender may have other low-down payment options available for you.

6. Deferred Payments: Discounted Mortgages

A deferred mortgage is a modified mortgage loan that requires no payments whatsoever so long as you live in your home. A deferred mortgage only comes due when you sell your home or refinance it.

Mortgage banks and brokers don’t issue mortgages with deferred mortgage payments. The best place to find a deferred mortgage is with a municipal government or local foundation, which may issue deferred mortgage loans in amounts up to $25,000. 

Deferred mortgages are often limited to low- to moderate-income first-time buyers with a decent credit history and record of on-time payments.

First-Time Home Buyer Programs: Congress Stimulus Programs

Congress regularly introduces first-time home buyer bills to help renters pursue of the American Dream of homeownership. Some bills pass into law. Others do not.

Here are several first-time home buyer programs in progress with the current Congress.

1. The $15,000 First-Time Homebuyer Act of 2024

The First-Time Homebuyer Act of 2024 gives eligible first-time home buyers a federal tax credit of up to $15,000 that can used at closing to make a down payment and pay closing costs, or be paid by the Treasury as a tax refund.

The First-Time Homebuyer Act of 2024 is a bi-cameral bill. It’s sometimes called the Biden First-Time Buyer Tax Credit because it was announced as part of the administration’s push for affordable housing and modeled after the Obama First-Time Buyer Tax Credit, which created more than 2.6 million new homeowners.

2. The $25,000 Downpayment Toward Equity 

The Downpayment Toward Equity Act is a cash grant that awards up to $20,000 to first-generation, first-time home buyers, plus an additional $5,000 to buyers from socially or economically disadvantaged backgrounds.

The bill’s language allows home buyers to use their $25,000 cash grant to make a down payment, pay closing costs or real estate taxes, or access lower mortgage rates.

3. The DASH Act

The DASH Act is a comprehensive housing bill, similar to the Biden Tax Credit bill, giving eligible first-time buyers a $15,000 federal income tax credit.

To qualify for the DASH Act as the bill’s written, home buyers must be low- to moderate-income earners, meet specific residency requirements, and purchase a home whose price is no more than 10 percent above the area’s conforming mortgage loan limit.

4. The HELPER Act

The HELPER Act is a mortgage bill allowing teachers, firefighters, and law enforcement officers to obtain mortgages without a down payment or monthly mortgage insurance.

HELPER stands for “Homes for Every Local Protector, Educator, and Responder.”

The HELPER Act is a bipartisan, bicameral bill with strong support and a long list of co-sponsors. The bill is piggybacked on the FHA mortgage program and could pass into law at any time.

5. The $10,000 Mortgage Credit Relief Program

The $10,000 Mortgage Credit Relief program is a proposal President Biden floated during his 2024 State of the Union address. The program would give eligible first-time home buyers two annual tax credits of $5,000 to offset the costs of carrying a higher mortgage.

Common Questions About First-Time Home Buyer Grants

What is a first-time home buyer?

A first-time home buyer is a person who has not owned their main residence in the 36 months prior. A person who owned a home previously and has not owned a home in 3 years is a first-time home buyer for the second time.

How do you buy a house if you have no money?

Home buyers with no money for a down payment can use housing grants, down payment assistance, and forgivable mortgages to purchase a home with no money down. Some home buyers are eligible for 100% mortgages via the USDA and VA loan programs. 

What is an NHF grant?

An NHF grant is a housing grant for first-time home buyers awarded by the National Homebuyers Fund. NHF awards housing grants for up to 5 percent of a home’s purchase price.

Which loan is best for first-time home buyers?

Most first-time home buyers use a conventional 30-year fixed-rate mortgage to purchase their first home, but that doesn’t make it the “best loan” for first-time buyers. Mortgages are not one-size-fits-all. Let a mortgage company pre-approve your mortgage and give you advice.

Are first-time home buyer programs for lower-income buyers only?

No, most first-time home buyer programs were created to promote homeownership among Americans, and healthy neighborhoods and communities. Some programs target lower-income households, but many serve buyers with all incomes.

Annual Percentage Rate (APR): A Longer Definition

Annual Percentage Rate (APR) is a government calculation based on the total payments a home buyer would make over time if the mortgage is held to its full term. It includes mortgage interest, closing costs, insurance premiums, and other loan-related expenses.

The helps home buyers compare two or more mortgages, but it should not be the only factor in making a decision.

For example, if a first-time home buyer is considering a 30-year fixed-rate FHA mortgage and has a Loan Estimate from two or more lenders, the mortgage with the lower APR may seem like the better offer. However, it is important to consider all aspects of the mortgage, such as upfront costs and how long the buyer intends to keep the loan.

There are cases when home buyers should not rely solely on APR, such as when the buyer plans to sell the home, pay off the mortgage, or refinance within the loan’s initial term, or when using an adjustable-rate mortgage, or when private mortgage insurance is required.

In these situations, the APR calculation may not reflect the actual cost of the mortgage over time, since it is based on assumptions that might not hold true in the future.

Common Questions About Annual Percentage Rate (APR)

How does APR differ from the mortgage interest rate?

The mortgage interest rate is the cost of borrowing the loan’s principal amount. The APR, on the other hand, reflects the interest rate plus additional fees and loan costs, offering a more complete picture of the loan’s cost. However, remember that it is not the only measure of affordability.

Can the APR change after I’ve secured a mortgage?

For fixed-rate mortgages, the APR remains constant unless mortgage insurance is required, which can change based on the loan’s principal and equity. For adjustable-rate mortgages, the APR changes when the interest rate does.

Is a mortgage with a lower APR always a better option?

A lower APR might suggest better terms, but not always. For example, a mortgage with several discount points may show a lower APR but higher closing costs, which may not fit your budget or needs. A mortgage with a higher APR but lower upfront costs could be better depending on your financial situation and how long you plan to keep the loan.

What kinds of fees are typically included in the APR?

Mortgage APR calculations include loan origination fees, discount points, mortgage insurance premiums, and closing costs. It does not include attorney or title fees, which would apply even if the buyer paid in cash.

How can I use APR when comparing mortgage offers?

To compare APRs effectively, ensure you’re comparing similar loans, such as 30-year fixed-rate mortgages, and verify that the mortgage insurance payment schedules are the same if applicable. APR is not useful for comparing adjustable-rate mortgages or different types of loans, like conventional versus FHA.

Amortization: A longer definition

Amortization refers to gradually reducing a loan balance through regular payments over a specified term, such as 30 years or 15 years.

Mortgage payments are divided between principal and interest, determined at the time the loan agreement is signed. An amortization schedule shows how each payment reduces the loan and how much is applied to interest.

For example, if you take out a 30-year FHA mortgage to buy a home, your amortization schedule will list all 360 payments. It will show how much of each payment goes toward reducing your loan balance and how much covers interest.

Over time, a larger portion of each mortgage payment is applied to the principal, reducing the loan balance, while the amount applied to interest decreases.

Questions Home Buyers Ask About Amortization

How does amortization affect mortgage payments?

In the early years of a mortgage, most of each payment is applied to interest. As time goes on, more of each payment is applied to reducing the loan balance (principal).

Can amortization schedules vary?

Most mortgages have a fixed amortization schedule. However, some loans with adjustable rates can change how much is allocated to principal and interest over time.

What is negative amortization?

Negative amortization occurs when payments are not enough to cover the interest, causing the loan balance to grow. Mortgages with negative amortization, such as Option ARMs, were largely discontinued in 2014 under guidelines.

A Longer Definition: Mortgage Guidelines

Mortgage guidelines serve as a lender’s approval checklist. They list the minimum standards required to approve a loan.

These guidelines vary by loan type.

For instance, conventional mortgage guidelines are different from FHA guidelines, which are also distinct from VA mortgage and USDA mortgage guidelines.

Additionally, within each loan type, programs may have different requirements.

Fannie Mae’s HomeReady mortgage, for example, targets low-to-moderate income households and has different standards than its HomePath program, which supports buying foreclosed properties.

Similarly, FHA’s has different guidelines compared to a standard FHA mortgage.

Mortgage guidelines cover a wide range of criteria, including:

• Credit score
• Down payment percentage
• Employment history
• Household income
• Citizenship status

Guidelines also outline requirements for property type, zoning, and the relationship between buyer and seller.

To lenders, these guidelines function as a checklist. When all items are met, the loan is approved.

Frequently Asked Questions About Mortgage Guidelines

Who makes mortgage guidelines?

Mortgage guidelines can be established by government agencies like Fannie Mae or Freddie Mac, or by individual lenders for specific loan programs.

How often do mortgage guidelines change?

Guidelines change based on economic conditions, legal requirements, and risk strategies. In some years, they may change frequently, while in others, updates are less common. Generally, agencies and lenders provide notice before making changes.

Why do some lenders not follow official mortgage guidelines?

Lenders may impose stricter standards than the official guidelines, called investor overlays. A common example is raising the minimum credit score required for a specific loan program.

What if I can’t meet all the mortgage guidelines?

Mortgage guidelines set minimum standards for loan approval. If you can’t meet a lender’s guidelines, you may want to explore different loan options or apply with another lender.

How can I get an exception to the mortgage guidelines?

Lenders may consider exceptions to specific guidelines when the borrower provides a reasonable and common-sense explanation. Exceptions are rare and typically require formal approval in writing.

A Longer Definition: Debt-to-Income Ratio

Debt-to-income ratio, commonly abbreviated as DTI, measures a home buyer’s ability to manage monthly payments and repay debts to creditors. Along with loan-to-value and credit score, debt-to-income is one of the three pillars of a strong mortgage application.

Mortgage lenders calculate debt-to-income by dividing a buyer’s recurring monthly debts into their gross monthly income, which is income earned before taxes and other deductions are applied.

Recurring debts used in the DTI calculation include minimum monthly payments for:

• Auto loans and car leases
• Student loans not in deferment
• Credit cards and charge cards
• Child support and alimony payments
• Expected future mortgage payments

Debt-to-income calculations do not consider a buyer’s other monthly expenses, which may include groceries, child care, and investment contributions. It also does not account for total household income.

DTI is strictly: how much a person is committed to spending each month compared to how much they earn.

Home buyers with lower debt-to-income ratios are more likely to get their mortgage approved, with most mortgage guidelines enforcing DTI maximums that buyers may not exceed.

Maximum debt-to-income ratios for popular mortgage programs

Debt-to-Income Ratio: A Real World Example

Imagine a first-time home buyer eager to purchase their dream home. They have 10 percent saved up for a down payment, but during their mortgage application process, the buyer learns their debt-to-income ratio is too high to get approved.

They change strategy. Instead of putting 10 percent down on their future home, the buyer opts for a smaller, 5% down payment and puts the remaining cash toward paying down their credit card balances.

This financial move immediately lowers the first-time buyer’s DTI, and their mortgage gets approved.

Common Questions About Debt-to-Income Ratio

What is a good debt-to-income ratio?

A good DTI ratio is one that allows you to comfortably meet your personal financial goals. For some people, that’s a DTI of 25%. For others, it’s 40% DTI. Find a balance between debt and income that works for your life.

Does my debt-to-income ratio affect my credit score?

No, your debt-to-income ratio is not reflected in your credit score. DTI measures your monthly obligations as a percentage of your income. Credit scores measure how well you pay your obligations.

Can I still get a mortgage with a high debt-to-income ratio?

Yes, plenty of home buyers get mortgage approvals with a higher-than-average debt-to-income ratio. As your DTI increases, however, lenders may require a larger down payment or you may lose access to certain mortgage types.

How can I improve my debt-to-income ratio?

To improve your DTI, increase your income, pay off debts, or do both. Paying down credit cards can reduce monthly minimums and substantially lower your DTI.

Are there any debts that are not included in the DTI calculation?

Yes, regular monthly expenses such as utilities, insurance, and groceries are not considered debts and are not included in your DTI calculation.

I have a car loan with 10 payments remaining. Is it included in my debt-to-income ratio?

No, mortgage lenders do not consider car loans with 10 or fewer payments in a home buyer’s debt-to-income calculation because the payments will end soon. Car leases are not excluded with 10 or fewer payments because a new lease usually begins when an existing car lease ends.

I have 10 child support payments remaining. Are the payments included in my debt-to-income ratio?

No, mortgage lenders will not include child support payments in a debt-to-income calculation when the payment schedule has 10 or fewer payments remaining.

Does co-signing a loan affect my debt-to-income ratio?

Yes, when you co-sign a loan, the loan’s payment is considered part of your recurring monthly debts. Even if you are not the primary borrower, the responsibility for repayment affects your debt-to-income ratio.

Can I exclude co-signed loans from my debt-to-income ratio?

In most cases, co-signed loans cannot be excluded from your DTI calculation unless you provide proof that the primary borrower has made on-time payments for a specified period, typically the prior 12 months or longer.

A Longer Definition: Arms-Length Transaction

An arms-length transaction in real estate is when a home buyer and seller agree on a deal and have neither a business nor a personal relationship.

Because the buyer and seller do not know each other, it signals to the mortgage lender and other parties that the home’s sale price reflects current market conditions.

As an illustration, let’s consider two scenarios.

In the first scenario, a first-time home buyer purchases their childhood home from a parent at a reduced price as a favor. This purchase would fail the arm’s-length transaction test because the relationship between the buyer and seller likely influenced the property’s sale price.

In the second scenario, a first-time home buyer purchases a move-in ready home from a builder who is developing homes in a desirable neighborhood. This purchase would pass the arm’s-length transaction test because the sale price is based on the home’s condition, location, and comparable home sale prices in the area.

Arm’s-length transactions are more likely to be approved for mortgages because non-arm’s-length transactions introduce lending risks. Lenders cannot determine a property’s fair market value when a child buys a home from a parent or a cousin buys a home from a cousin.

Non-arm’s-length transactions are considered red flags in mortgage approval. Only an arms-length sale gives lenders confidence that a fair market valuation supports the loaned amount.

Questions Home Buyers Ask About Arm’s-Length Transactions

Why do lenders care whether my purchase is an arm’s-length transaction or not?

Lenders care about arms-length transactions to ensure the property’s value is market-driven and unbiased. Personal ties can distort property values, increasing lending risks.

Can any transaction between family members be considered arm’s length?

Transactions between family members are typically not considered arms-length because personal relationships can influence terms and pricing, leading to potential biases. An arms-length transaction requires both parties to have no personal ties, ensuring decisions are purely market-driven.

How can I prove my home purchase transaction is an arm’s-length transaction?

To prove an arms-length transaction, demonstrate there are no personal ties between buyer and seller, use a home appraisal and market analyses to validate terms and pricing, and negotiate through an impartial third-party, such as a REALTOR® or attorney.

Can a non-arm’s-length transaction impact mortgage approval?

Yes, mortgage lenders scrutinize non-arm’s-length transactions, which may affect loan terms, property valuation, and approval due to potential conflicts of interest.

What are some examples of relationships that are non-arm’s length transactions?

A few non-obvious examples of non-arm’s-length transactions in real estate include a property manager buying from a landlord they represent, a real estate developer buying a home from a contractor they frequently employ, a landlord selling to their tenant, a neighbor selling a home without an impartial intermediary, and a real estate agent buying from a client they have previously advised or represented.