First-Time Homebuyer Guide: Mortgage Basics for 2026

Buying your first home is exciting and overwhelming. Understanding mortgage basics helps you navigate the process confidently and avoid costly mistakes.

How Much House Can You Afford?

The 28/36 Rule

28% Rule: Housing costs ≤ 28% of gross monthly income
36% Rule: Total debt ≤ 36% of gross monthly income

Example: $80,000 annual income

• Monthly gross: $6,667
• Max housing payment: $1,867 (28%)
• Max total debt: $2,400 (36%)

What's Included in Housing Costs?

PITI:

• Principal (loan payment)
• Interest
• Taxes (property)
• Insurance (homeowners)
• Plus PMI if less than 20% down

Down Payment Options

Traditional 20% Down

Pros: No PMI, better rates, lower payments
Cons: Takes years to save

Example: $350,000 home

• 20% down: $70,000
• Loan: $280,000
• No PMI

Low Down Payment Programs

Conventional (3-5% down):

• 3% down for first-time buyers
• 5% down standard
• PMI required
• Good credit needed (620+)

FHA (3.5% down):

• More lenient credit (580+)
• Higher debt-to-income allowed
• Mortgage insurance required
• Popular for first-timers

VA Loans (0% down):

• For veterans/active military
• No PMI
• Competitive rates
• Funding fee applies

USDA (0% down):

• Rural/suburban areas
• Income limits apply
• No PMI
• Property must qualify

Example: $350,000 home with 5% down

• Down payment: $17,500
• Loan: $332,500
• PMI: ~$180/month
• More affordable upfront

Understanding PMI

Private Mortgage Insurance protects lender if you default.

Cost: 0.5-1% of loan amount annually

Example: $300,000 loan

• PMI: 0.75% = $2,250/year
• Monthly: $188

How to remove PMI:

• Reach 20% equity
• Request removal at 20%
• Auto-cancels at 22%
• Refinance when you hit 20%

Credit Score Impact

Rate differences on $300,000 loan:

A 100-point score difference = $107,640 over 30 years!

Closing Costs

Expect 2-5% of home price

Example: $350,000 home

• Closing costs: $7,000-$17,500

What's included:

• Loan origination fee (0.5-1%)
• Appraisal ($400-600)
• Home inspection ($300-500)
• Title insurance ($1,000-2,000)
• Attorney fees ($500-1,500)
• Recording fees ($100-300)
• Prepaid taxes/insurance
• HOA transfer fees

Negotiation tip: Ask seller to cover some closing costs

The Home Buying Process

Step 1: Check Your Credit (3-6 months before)

• Get free credit reports
• Fix errors
• Pay down credit cards
• Don't open new accounts

Step 2: Save for Down Payment + Closing

$350,000 home budget:

• 5% down: $17,500
• Closing costs: $10,000
• Moving/immediate repairs: $5,000
• Total needed: $32,500

Step 3: Get Pre-Approved

Pre-qualification: Rough estimate based on your word
Pre-approval: Lender verifies income, credit, assets

Why pre-approval matters:

• Know exact budget
• Sellers take you seriously
• Faster closing
• Locks in rate (usually 60-90 days)

Step 4: Find a Home

Work with buyer's agent (seller pays their commission)

Don't skip:

• Home inspection ($300-500)
• Pest inspection
• Radon testing (if applicable)
• Well/septic inspection (rural)

Step 5: Make an Offer

Include:

• Purchase price
• Earnest money deposit (1-3%)
• Contingencies (inspection, appraisal, financing)
• Closing timeline

Step 6: Home Inspection

If issues found:

• Request repairs
• Ask for credit
• Renegotiate price
• Walk away (if contingency included)

Step 7: Appraisal

Lender orders appraisal to confirm home value.

If appraisal comes in low:

• Renegotiate price
• Increase down payment
• Challenge appraisal
• Walk away

Step 8: Final Walkthrough

24-48 hours before closing:

• Verify repairs completed
• Check condition
• Test appliances
• Confirm nothing removed

Step 9: Closing

Sign documents, pay closing costs, get keys!

First-Time Buyer Programs

Federal Programs

• FHA loans (3.5% down)
• VA loans (0% down for veterans)
• USDA loans (0% down, rural areas)

State/Local Programs

• Down payment assistance
• Closing cost grants
• Tax credits
• Below-market interest rates

Check: Your state housing finance agency website

Common First-Time Buyer Mistakes

1. Not Shopping for Rates

Get quotes from at least 3 lenders. A 0.25% difference = $20,000 over 30 years.

2. Maxing Out Budget

Leave room for:

• Maintenance (1-2% of home value annually)
• Unexpected repairs
• HOA increases
• Property tax increases

3. Skipping Home Inspection

Never waive inspection to win bidding war. A $400 inspection can save you from $50,000 in hidden problems.

4. Ignoring Total Monthly Cost

Don't just look at mortgage payment. Include:

• Utilities (higher than renting)
• Maintenance
• HOA fees
• Lawn care/snow removal
• Higher insurance

5. Depleting Emergency Fund

Keep 3-6 months expenses AFTER buying. Homes have unexpected costs.

15-Year vs. 30-Year Mortgage

$300,000 loan:

30-Year at 6.5%:

• Monthly P&I: $1,896
• Total interest: $382,560

15-Year at 5.75%:

• Monthly P&I: $2,493
• Total interest: $148,740
• Savings: $233,820!

Consider 15-year if:

• You can afford higher payment
• Want to build equity faster
• Plan to stay long-term
• Approaching retirement

Calculate Your Mortgage

Use our Mortgage Calculator to:

1. Determine affordable home price
2. Compare 15 vs. 30-year options
3. See impact of different down payments
4. Calculate total costs including PMI
5. Plan your home buying budget

Remember: Homeownership is a long-term commitment. Buy what you can comfortably afford, not the maximum you qualify for.

Calculate your home buying budget with our Mortgage Calculator