The real numbers behind buying your first home
Edited by Anil · Reviewed · 7 min read
A first home costs more upfront and more each month than the listing suggests. On a $300,000 home with 5% down, an example buyer needs about $24,000 in cash and pays about $2,344 a month, and a lender may approve far more than that budget can carry.
Start with a monthly number, not a price
Pick the payment you can live with first, then work back to a price. Starting with a listing price makes it easy to stretch. Throughout this guide we'll follow one example: a single buyer earning $85,000 a year, with $350 a month in other debts and $45,000 in savings, looking at a $300,000 home. The rate of 6.5%, 1.1% property tax, and $1,500 a year of insurance are illustrations. Swap in your own numbers using the mortgage calculator.
This buyer's monthly income before tax is $7,083. Under the 28/36 rule of thumb, housing stays under 28% of that and all debts under 36%. The home affordability calculator puts that at a home of about $255,700 with $15,000 down. The home this buyer likes costs $44,300 more than that.
How much down payment do you really need?
You don't need 20%, and putting everything into the down payment can be the wrong call. The Consumer Financial Protection Bureau (CFPB) says that in most cases you need at least 3%, and many loans and lenders want 5% or more. FHA requires at least 3.5%. VA loans can need nothing if you're eligible and the price isn't above the appraised value. Freddie Mac's Home Possible loan allows 3% down, with income limited to 80% of area median income.
| Loan and down payment | Down | Cash needed with closing | Left of $45,000 | Total a month |
|---|---|---|---|---|
| FHA, 3.5% | $10,500 | $19,500 | $25,500 | $2,395 |
| Conventional, 5% | $15,000 | $24,000 | $21,000 | $2,344 |
| Conventional, 10% | $30,000 | $39,000 | $6,000 | $2,242 |
| Conventional, 20% | $60,000 | $69,000 | -$24,000 | $1,917 |
Here the 20% row is out of reach: this buyer would be $24,000 short. The 10% row leaves $6,000. That matters more than it looks. The CFPB suggests keeping three to six months of expenses after closing, which is $10,500 to $21,000 if this buyer spends $3,500 a month. It also warns that money put into a home isn't easy to get back out. So 5% down, leaving $21,000, may be safer than 10% even though the monthly bill is higher.
One detail can save you money. The CFPB notes lenders generally price loans in 5% steps, and there are usually no savings for putting down almost the required amount. If you're at 9.5%, ask what reaching 10% would change. If you're at 7%, an extra thousand may do nothing for your rate.
What PMI costs, and when it ends
At a 0.6% rate, which you should replace with a real quote, PMI adds $143 a month to this 5% down loan. It isn't permanent on a conventional loan.
- You can ask to cancel it when your balance reaches 80% of the home's original value. On this schedule that's after about 10 yrs 4 mos, or sooner with extra payments. You'll need a good payment history and may need to show the value hasn't fallen, usually with an appraisal.
- It generally ends automatically when your balance is scheduled to reach 78%, about 11 yrs 3 mos in, if you're current.
- It must end by the midpoint of the loan, 15 years on a 30-year loan, if you're current.
In total this buyer would pay about $17,670 in PMI by requesting cancellation at 80%, or $19,238 by waiting for 78%. Set a reminder, because cancellation won't happen at 80% unless you ask.
FHA mortgage insurance works differently
FHA charges 1.75% upfront, $5,066 on this loan, usually added to the balance. With under 10% down, the annual premium lasts the full term, rather than ending at 78%. Over 7 years, this example pays $11,146 in annual FHA premiums against $11,970 in PMI, and that's before the upfront premium. Over the full loan, FHA premiums reach $47,768, unless you refinance out. FHA can still fit if your credit makes conventional PMI expensive, so compare real quotes from both. Use the refinance calculator to test leaving FHA later.
Should you wait until you have 20% down?
Run the math before you decide. Going from 5% to 20% takes $45,000 more. Saving $800 a month, that's 4 yrs 9 mos, plus whatever a higher price may add. PMI over the request period costs $17,670. Waiting avoids that, but you keep paying rent and take the risk that prices or rates move. No calculation settles that for you. The rent vs. buy calculator and the savings calculator can frame the choice.
Closing costs add thousands in cash on top
Plan on $6,000 to $15,000 on this home. The CFPB says closing costs typically range from 2% to 5% of the purchase price, not counting your down payment. They cover items such as appraisal fees, title insurance, and government taxes, plus prepaid property taxes, homeowners insurance, and interest until your first payment is due.
Asking the seller to pay isn't free money. The CFPB notes that seller credits usually come with a higher purchase price, and lender credits typically raise your loan amount or rate. You may pay either way, just over a longer period. A credit can still help when your problem is cash today, so compare both versions in the mortgage calculator.
Two documents keep you honest. Your lender must give you a Loan Estimate within three business days of your application, and it shows your cash to close. Your lender must also give you a Closing Disclosure three business days before closing. Compare the two line by line, and ask about anything that changed.
What lenders see: your debt-to-income ratio
Lenders check your debt-to-income ratio, or DTI: monthly debt payments divided by gross monthly income. This buyer's $2,344 housing payment is 33.1% of gross income, and adding $350 in debts brings the total to 38%. That's above the 28/36 rule of thumb on both counts, yet this buyer may still be approved.
Lender limits are usually higher, and they differ by loan. Fannie Mae caps total DTI at 36% on manually underwritten loans, up to 45% with stronger credit and reserves, and up to 50% through its automated system. FHA's manual standard is 31% for housing and 43% in total, rising to 40% and 50% with certain compensating factors. As the CFPB puts it, different products and lenders have different limits.
| Limits | Home price | Housing payment | Share of take-home |
|---|---|---|---|
| 28% / 36% | $255,700 | $1,983 | 35% |
| 31% / 43% | $281,800 | $2,196 | 38% |
| 40% / 50% | $360,000 | $2,833 | 50% |
Debts weigh on this heavily. Fannie Mae counts installment debts running beyond ten months, revolving payments, and leases of any length. Clearing a car loan before you apply can raise the price you qualify for once debts are your limit. The debt payoff calculator can help you plan it.
What you can really afford is a different number
DTI looks at income before tax, but you pay your mortgage after tax. This buyer's take-home is about $5,719 a month, counting 2026 federal income tax and payroll tax for a single filer, before state tax, retirement savings, or health premiums.
| Item | A month |
|---|---|
| Take-home pay | $5,719 |
| Housing payment | $2,344 |
| Other debts | $350 |
| Maintenance at 1% of price a year (rule of thumb) | $250 |
| Left for everything else | $2,775 |
That remaining $2,775 still has to cover utilities, food, car costs, savings, and fun. The CFPB says maintenance, repairs, and utilities can be significant and vary with your climate and the home. A lender's ratios don't measure whether this works for you, or whether you can still save for retirement. Run it through the budget calculator, then try this test: for three to six months before buying, set aside the gap between your rent and your future housing cost. If that hurts, you've learned something cheaply.
Your rate matters, so shop it
| Rate | Payment | Change from 6.5% |
|---|---|---|
| 6% | $1,709 | -$93 |
| 6.5% | $1,801 | Starting point |
| 7% | $1,896 | +$95 |
| 7.5% | $1,993 | +$191 |
Get Loan Estimates from several lenders for the same kind of loan, since the CFPB says that's the best way to tell if an offer is competitive. Compare origination charges and total closing costs along with the rate, because a low rate can come with points. Each point costs 1% of the loan, or $2,850 here. If one point lowered this rate by a quarter (an example), you'd save $47 a month and need 62 months, about 5 yrs 2 mos, to earn it back. If you might move or refinance before then, it won't pay off.
Stress-test the payment before you sign
Your principal and interest stay fixed on a fixed-rate loan, but the rest doesn't. The CFPB notes your payment goes up or down with your taxes and insurance premiums. Try these changes on this example:
| What changes | New total a month | Increase |
|---|---|---|
| Insurance up 50%, to $2,250 a year | $2,406 | $63 |
| Tax rate up to 1.5% | $2,444 | $100 |
| Both | $2,506 | $163 |
Get a real insurance quote before you make an offer, and look up the tax bill for that specific home with the county assessor. Those two inputs are only guesses until you check them.
What to do, in order
- Find your comfortable payment with the budget calculator and the home affordability calculator.
- Work out your cash: down payment, closing costs, moving and repair money, and an emergency fund that stays untouched.
- Check whether buying beats renting for how long you expect to stay.
- Look for help. HUD points buyers to homebuying programs in each state. If an assistance program is a second loan, read how and when it must be repaid.
- Talk to a HUD-approved housing counselor, often at little or no cost, especially if your credit or savings are thin.
- Compare Loan Estimates from several lenders, then check your Closing Disclosure against the one you chose.
This guide uses example numbers, so your own results will differ. For decisions about your tax situation or a contract, a tax professional or real estate attorney can give advice that applies to you.
Common questions
Do I have to be a first-time buyer to use FHA or low down payment loans?
Not for VA loans, whose fee chart has a rate for people using the benefit again. HUD describes FHA as a good option for first-time buyers, not a requirement. Each program has its own rules, such as VA service requirements or Home Possible's income limit, so confirm with a lender.
Should I put down more or keep more in savings?
Keep your emergency fund first. The CFPB suggests three to six months of expenses, plus money for moving and repairs. After that, a bigger down payment lowers your payment and can remove PMI, but it's hard to get that money back out quickly.
Does getting pre-approved mean I can afford that amount?
No. A pre-approval reflects what a lender may lend, based mainly on your income, debts, and credit. It doesn't measure your savings goals or how you want to live. Treat it as a ceiling, not a target.
How much cash should I have before buying a $300,000 home?
In this example, about $24,000 for 5% down and closing, plus $10,500 to $21,000 in reserves, for a total of $34,500 to $45,000. Your own closing costs and monthly spending change those numbers.
Sources
- Determine your down payment · Consumer Financial Protection Bureau
- Figure out how much you want to spend · Consumer Financial Protection Bureau
- When can I remove private mortgage insurance (PMI) from my loan? · Consumer Financial Protection Bureau
- What fees or charges are paid when closing on a mortgage and who pays them? · Consumer Financial Protection Bureau
- What is a debt-to-income ratio? · Consumer Financial Protection Bureau
- Why did my monthly mortgage payment go up or change? · Consumer Financial Protection Bureau
- What is a Loan Estimate? · Consumer Financial Protection Bureau
- Closing Disclosure explainer · Consumer Financial Protection Bureau
- B3-6-02: Debt-to-income ratios (Selling Guide) · Fannie Mae
- FHA Single Family Housing Policy Handbook 4000.1 · U.S. Department of Housing and Urban Development
- Mortgagee Letter 2023-05: FHA annual mortgage insurance premiums · U.S. Department of Housing and Urban Development
- Purchase loan · U.S. Department of Veterans Affairs
- Home Possible · Freddie Mac
- Buying a home · U.S. Department of Housing and Urban Development
Disclaimer: Estimates for educational purposes only, not financial, tax, investment, or legal advice. Check important numbers with your lender, plan, or a qualified professional. Full disclaimer.