iAdviser Buying Your First Home: Costs, PMI, and DTI Guide
Buying Your First Home: Down Payment, PMI, Closing Costs, and DTI Ratios
A first-home budget needs three separate totals: cash required to complete the purchase, money retained after closing and the full monthly cost of living in the property. A lender’s approval addresses a different question: whether the proposed loan meets its underwriting requirements.
Get property-specific taxes, insurance quotes, and lender documents early. For current rate context, Freddie Mac’s October 29, 2026 survey reported a 7.24% average 30-year fixed rate. The worked purchase below uses a hypothetical $420,000 price and 6.5% rate, with a 7.24% comparison later. Rules and sources were checked November 3, 2026.
Build a cash-to-close worksheet without double counting
The CFPB’s Loan Estimate explainer distinguishes closing costs from estimated cash to close. Cash to close accounts for the down payment, applicable charges, deposits and credits. It is the amount still required at closing, not every dollar spent during the purchase process.
For a hypothetical $420,000 purchase with 10% down:
| Cash item | Illustration |
|---|---|
| Down payment | $42,000 |
| Total closing charges, prepaids and initial escrow | $12,000 |
| Earnest-money deposit already credited | −$5,000 |
| Lender-approved seller credit | −$3,000 |
| Remaining cash to close | $46,000 |
The buyer has also already paid the $5,000 deposit. If a $600 appraisal is included in the $12,000 charges but paid before closing, it must be reflected as already paid when calculating the final amount due. Adding it again outside the worksheet would overstate the cost.
Separately budget inspection costs, moving, immediate repairs and the emergency reserve you intend to retain. A hypothetical additional $1,000 for inspections, $2,000 for moving and $8,000 for a known repair adds $11,000 to the broader purchase budget, before the reserve. The settlement documents determine actual amounts and credits.
Compare down-payment options with their insurance rules
CFPB guidance identifies eligible conventional loans with down payments as low as 3%, and FHA options as low as 3.5%. Ask lenders which programs your credit, income, property, and intended use qualify for before setting the cash requirement.
On a hypothetical $420,000 price, 3% is $12,600, 3.5% is $14,700 and 20% is $84,000. The lower down payment preserves cash but usually increases the amount borrowed and may add mortgage-insurance costs. Compare complete loan offers at the same price and intended holding period.
Special programs can include VA loans for eligible service members, veterans and surviving spouses, and USDA programs for qualifying borrowers and rural properties. Zero-down options still have underwriting requirements and may have program fees. VA loans do not require monthly mortgage insurance; USDA financing has its own fees. State assistance can be a grant, a repayable second loan or a loan with conditions for forgiveness. Read sale, refinance and occupancy conditions before treating assistance as free money.
Understand exactly when conventional PMI can end
Private mortgage insurance protects the lender against covered default losses. It does not make your mortgage payment if you lose a job.
For covered borrower-paid PMI, the CFPB explains that you may request cancellation at 80% of the home’s original value, including earlier through additional principal payments. A written request, satisfactory payment history, current payments, no junior liens and evidence against a decline in value can be required. Original value for a purchase generally means the lower of sale price or original appraisal.
Automatic termination generally occurs on the scheduled 78% date if payments are current. It is not triggered simply because an online estimate suggests 22% equity. Other rules, including midpoint termination and investor-specific cancellation policies, can apply. FHA and lender-paid mortgage insurance follow different rules.
At an original value of $420,000, the 80% balance is $336,000 and 78% is $327,600. Keep the PMI disclosure, request the scheduled termination date, and ask the servicer what evidence is needed for earlier cancellation. Use the actual lender’s PMI quote in the monthly comparison.
FHA mortgage insurance is a different cost
HUD’s premium guidance lists an upfront premium of 1.75% of the base loan for most standard FHA purchase loans, plus annual mortgage insurance collected monthly. Rates vary with loan amount, term and original loan-to-value ratio.
For example, a $420,000 purchase with 3.5% down has a $405,300 base loan. A 1.75% upfront premium is $7,092.75. If entirely financed, the starting balance becomes $412,392.75 before any other permitted adjustments. Include that financing when comparing principal and interest with a conventional offer.
HUD’s duration table states that, for case numbers assigned on or after June 3, 2013, annual MIP generally lasts 11 years when original LTV is 90% or less and the loan term when it exceeds 90%. Paying down to 80% later does not apply conventional PMI cancellation rules to this FHA coverage. Refinancing is a new credit decision with new costs, not a guaranteed future exit.
Calculate DTI using qualifying income and obligations
Debt-to-income ratio divides qualifying monthly obligations by qualifying gross monthly income. The lender decides which income is sufficiently documented and how to count obligations. Your spendable after-tax budget is a separate calculation.
Fannie Mae’s Selling Guide sets a 36% maximum total DTI for manually underwritten loans, with up to 45% under specified credit-score and reserve conditions. Desktop Underwriter casefiles can reach 50%. Ask the lender to identify the applicable route and remaining underwriting requirements, then assess affordability through the take-home-pay budget.
With $10,000 qualifying monthly gross income, a $3,249.22 housing obligation, and $900 in other counted debts, total DTI is about 41.49%. Then run a separate take-home-pay budget that includes food, childcare, utilities, saving, and other costs outside the underwriting ratio.
Before paying off a debt solely to improve DTI, compare the reduction in its required payment with the cash reserves consumed. Do not assume a new side job immediately qualifies as income or that changing a student-loan payment automatically changes underwriting treatment. Ask the lender to document the calculation.
Separate the mortgage payment from the ownership budget
For a $378,000 fixed-rate loan at a hypothetical 6.5% over 30 years, monthly principal and interest is about $2,389.22. The formula is P × r / (1 − (1+r)^−n), where P is principal, r is the annual rate divided by 12 and n is 360.
| Monthly expense | Hypothetical amount |
|---|---|
| Principal and interest | $2,389.22 |
| Property taxes | $450 |
| Homeowners insurance | $180 |
| PMI | $150 |
| HOA dues | $80 |
| Maintenance reserve | $350 |
| Additional utility budget | $200 |
| Total | $3,799.22 |
The first five items total $3,249.22, the housing amount used in the DTI example. Maintenance and utilities bring the ownership budget to $3,799.22. Use inspection findings, equipment age, and local repair estimates to replace the $350 maintenance assumption.
At 7.24%, the same $378,000 loan over 30 years has principal and interest of about $2,576.06—$186.84 more each month than the 6.5% illustration. Holding the other sample costs constant raises the ownership budget to $3,986.06. This sensitivity check shows why the actual locked rate belongs in the final budget.
Compare lender credits and points over your horizon
A lender credit can lower closing cash in exchange for a higher rate. Discount points can require more upfront cash for a lower rate. Compare offers issued on similar dates with the same lock period, loan amount and product.
If one hypothetical option costs $3,000 more upfront but saves $75 monthly, simple break-even is 40 months. That calculation omits differences in remaining principal, taxes and the time value of money, but it identifies a question worth examining. A plan to refinance in two years is uncertain: future rates, equity and qualification may not cooperate.
For rent-versus-buy analysis, include acquisition and eventual sale costs, maintenance, property taxes, insurance, and the return forgone on upfront cash. Compare several holding periods, including an earlier move than planned, and test flat property prices alongside any appreciation assumption.
Make the offer fit the completed budget
Before committing, identify the cash remaining after closing and known repairs, the monthly surplus after all household costs, and the loan features that could change payments. Verify property-specific tax and insurance estimates and read association documents for assessments. The useful buying limit is the one supported by that complete worksheet, even when a lender is willing to approve more.
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About This Article
Researched and written by the iAdviser editorial team using official sources. This article is for informational purposes only and does not constitute professional advice.
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