First-time homebuyers are a huge part of the housing market. In fact, in 2022, they accounted for 34% of all home purchases in the U.S, despite growing prices and a competitive housing market—demonstrating the enduring appeal of homeownership.

But if you’ve browsed recent home prices in the Philadelphia area, you might be wondering how it’s possible for first-time buyers and buyers on a budget to find a home that meets their needs—even if they are able to navigate the other challenges of purchasing a home. In this post we hope to help potential homebuyers better understand the process—from setting a budget to applying for a loan—and also know what resources may be available for individuals to overcome financial hurdles to homeownership. Keep reading to learn more!

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Misconceptions About Home Buying

If you have been dreaming of buying a home but are worried that your financial picture might put homeownership out of reach, it’s important to explore potential issues to see if they truly are a hurdle for you.

Misconception #1: You need a 20% down payment.

Many first-time buyers believe that a 20% down payment is a strict requirement. However, there are numerous loan programs available to qualified buyers that allow for lower down payments, ranging from no down payment at all to 10%. 

You may not need 20% down for a conventional mortgage, and many individuals are able to get approved with as little as 3 to 5% down. Government-backed mortgages available through your bank are another low down-payment option. FHA Loans, for instance, are particularly popular among first-time buyers for this reason because they only require a 3.5% down payment. Veterans and active service members may qualify for a VA Loan, which has no down payment requirement. And if you’re buying a home in a rural area, you may be able to use a 0% down USDA Home Loan.

It’s important to note that there may be fees associated with loans when you put less than 20% down. These can include a monthly PMI (private mortgage insurance) payment for conventional loans, as well as annual fees or mortgage insurance premiums for government guaranteed loans. Be sure to speak to your lender to understand these tradeoffs. 

Misconception #2: You need excellent credit to qualify for a loan.

Another common myth that first-time buyers may have is that you need a near-perfect credit score to get approved for a mortgage. While a higher credit score (740+) can secure more favorable mortgage rates, there are options available for those with less than perfect credit. 

You may qualify for a conventional mortgage with a score over 620. But the same government-back loans we mentioned above often have looser credit restrictions. Credit scores for FHA loans can be as low as 500 (with a 10% down payment). For VA and USDA loans, there is no set lower limit, but it may be possible to get qualified if your score is under 620 and you are able to meet other criteria. 

Misconception #3: Renting is more affordable than homeownership.

It is true that in many places where home prices have risen, it is more affordable to rent than to buy a similar home. However, that is not the case across the board—even across neighborhood boundaries.

To compare your options, you can use a simple formula called the “price-to-rent’ ratio. This ratio is calculated by dividing the home purchase price by the annual rent amount and is often used as a tool to assess whether it makes more sense to buy or rent a home in a particular market.

  • A ratio of about 15 or less means it may be better to buy.
  • A ratio between 16 and 20 suggests a more balanced market, where buying and renting are both viable options.
  • A ratio above 20 often indicates that renting is likely more affordable. 

Keep in mind that owning a home is also a long-term investment. It allows for building equity, and with some ingenuity you may be able to swing a comparable monthly mortgage payment, even in competitive housing markets.


Understanding Your Financial Health

Before you apply for a mortgage and start your search, it’s crucial to have an understanding of the main components that go into determining mortgage approvals. These include your credit, income, and debt-to-income ratios.

Tips on Improving Credit Scores Over Time

If you have little or no credit history or a history of bad credit, know that it’s possible to improve your score quite drastically over time—even making improvements in the short-term. 

First, if you don’t already, you need to regularly check your credit reports for errors or discrepancies. If you find any mistakes that are bringing down your score, they can be disputed to improve it.

Secondly, be sure that—going forward—make your payments on time. If you miss a due date, pay as soon as possible, as late payments of less than 30 days aren’t reported (though you may need to pay fees). The most recent payments you make have a bigger impact than payments farther in the past, so starting on the right foot today will lead to near-term gains.

Another way to boost your credit score is to lower your credit utilization rate—how much credit you used compared to your credit limit. Ideally, keep yours below 30% for all accounts. This can be achieved by paying down credit card balances or requesting higher credit limits from your credit card company.

Lastly, it’s important to know that opening new accounts can temporarily lower credit scores. If you’re looking to apply for a mortgage soon, avoid taking out new loans or credit cards.

How Different Types of Debt Can Impact Home-Buying Capabilities

If you already have some debts, you may worry about how they can impact your ability to qualify for a loan. Let’s take a closer look at how debt affects loan approvals.

Your debt-to-income ratio (DTI) may be the simplest way to determine how much your current debt will affect your home loan approval and the amount you can get approved for. Simply put, your DTI is the percentage of your monthly income that goes towards paying debts, and you can calculate it by dividing total monthly debt payments by your gross monthly income (before taxes).  For example, if your income is $6,000/month before taxes, but you have car loan, student loan, and minimum credit card payments totaling $900, your current DTI is 15%.

Your mortgage payment will be added to your current DTI to determine what it would be like if you were approved for a certain loan. Preferred DTI for mortgage approval is usually 40% or lower, though many government-backed loans have more flexibility on this figure. If your DTI is preventing you from qualifying, you may also consider paying off your smaller debts to eliminate their monthly payments. If you have student loans, consider an income-driven repayment plan.

Beyond DTI, certain debts may affect your ability for approval more than others. Student loans with low monthly payments can actually improve your chances of approval, if you pay on time each month. High-interest credit card debt, auto loans, and personal loans on the other hand, can make it harder to qualify, especially if monthly payments rack up your DTI. Paying these off could make the difference between an approval and a rejection of your mortgage application.


Determining Home Affordability

First-time home buyers may kickstart their search by exploring the listings for homes that check all their boxes. However, to avoid setting yourself up for disappointment (or becoming “house poor” by overspending!), start with your budget instead. 

Higher interest rates and high demand in local housing markets may mean that you get less home for your dollar. But knowing your max budget can help you navigate available options, adjust expectations, or look outside of your top-choice neighborhoods to get what you want.

How to Calculate How Much Home You Can Afford

Your DTI can dictate your mortgage approval, but it’s more of a tool for lenders than individuals. What actually is affordable to you may be a different figure, so when creating your budget, take the time to examine your income, current lifestyle, and existing debts. 

The 28/40 rule is one way to determine an appropriate budget. The first part of this rule states that your total housing expenses (mortgage payments, property taxes, insurance, etc.) should not exceed 28% of your gross monthly income. The second part refers to your DTI: The sum of all your debts, including housing costs, car and personal loans, credit card payments, and student loans should not be more than 36% of your gross monthly income.

Another way to set your home-buying budget is to look at your current budget. How much do you pay for rent right now? How much money do you have leftover each month? Can you swing a bigger payment, and by how much? 

Lastly, don’t forget to consider your future financial plans. When creating a spending range for your home purchase, it’s also important to consider potential future expenses and economic outlooks. If you are planning to have children, will your income take a hit or will you have to consider major expenses like childcare? Are you considering a career change that could undercut your income? Will you be able to maintain your retirement savings with a larger monthly payment? 


Exploring Down Payment and Closing Cost Assistance Programs

No, you don’t need 20% down to buy a home. Larger down payments can lead to significant interest savings over the life of the loan, lower monthly payments, and provide immediate equity in the home. However, tying up a large amount of cash might not be the best financial strategy for everyone—and not everyone can afford a huge down payment. 

So, what do you do if 20% down isn’t in the cards for you? In addition to taking advantage of the alternative loan programs we discussed above, you may be able to qualify for a down payment or closing cost assistance program. Many programs are available for both low- and moderate-income buyers, and some are open to all income levels—especially for first-time buyers. Let’s take a look at a few local options. 

Down Payment Assistance Programs in New Jersey

The Road Home New Jersey through the New Jersey Housing and Mortgage Finance Agency (“NJHMFA”) offers up to $15,000 in down payment assistance (DPA) for first-time homebuyers, and another $7,000 if you are a first generation buyer (your parents did not own a home). Assistance comes in the form of a forgivable, interest-free loan with no monthly payment (payment is only required if you sell your home within five years). 

NJHMFA also has other loan options for first-time homebuyers and other qualifying homebuyers, including the HFA Advantage Mortgage Program and the First-Time Homebuyer Mortgage Program. Each offer affordable 30-year mortgages that can be paired with down payment assistance. 

Down Payment Assistance Programs in Pennsylvania

Buying a home in PA? The Pennsylvania Housing Finance Agency (“PHFA”) has lots of opportunities for assistance for individuals who meet certain income and other requirements. These include:

  • PHFA Grants: $500 grants to assist with down payments and closing costs
  • Keystone Advantage Assistance Loan Program: A second home loan of up to 4% or $6,000, to be used for down payment and closing costs
  • Keystone Forgivable in Ten Years Loan Program (K-FIT): A forgivable loan for up to 5% of your total home cost for down payment and closing costs
  • HOMEstead Downpayment and Closing Cost Assistance Loan: A forgivable loan for up to $10,000 of your total home cost for down payment and closing costs

You may also find localized options in Philadelphia  through Philadelphia Housing Development Corporation (“PHCD”), ​Delaware County, Montgomery County, and Upper Darby Township.


Understanding the Mortgage Process

Ready to start the process of buying your home? Here are the general steps you can follow to guide you on the way.

Step 1: Assess Your Financial Health

  • Check Your Credit Score: Obtain your credit report and score to understand your creditworthiness.
  • Calculate Your Budget: Assess your budget to determine how much you can afford for a mortgage payment.
  • Save for Your Down Payment and Closing Costs: Ensure you have sufficient savings for the down payment and additional costs associated with buying a home. Explore your options for assistance.

Step 2: Get Pre-Approved for a Mortgage

  • Gather Documentation: Prepare necessary documents, including proof of income, employment verification, and bank statements.
  • Compare Options: Shop around with various lenders to compare rates and terms. Be sure you look for a lender that accepts down payment assistance if you will utilize these funds. 
  • Obtain a Pre-Approval Letter: A pre-approval letter indicates how much the lender is willing to lend you, giving you a budget for house hunting. Your lender can help you navigate the pre-approval process.

Step 3: Find Your Home

  • Find a Trusted Real Estate Agent: Consulting friends, family members, and local groups and discussion boards, find an experienced local agent to facilitate your house search.
  • House Hunting: Start searching for homes within your pre-approved budget.
  • Make an Offer: Once you find a home, prepare and make an offer through your real estate agent. Note, you may need to offer a “good faith” deposit at this time.

Step 4: Complete Your Loan Application

  • Complete Formal Loan Application: More thorough than your pre-approval, after your offer is accepted, you’ll formally apply for the mortgage with the chosen lender.
  • Submit Detailed Documentation: Provide any additional documentation the lender requests. This could include tax returns, gift money verification letters, and bank statements.

Step 5: Loan Processing and Underwriting

  • Loan Processing: During this time, your lender and their team review your application and verify your financial information.
  • Underwriting: The underwriter of your loan assesses the risk of lending to you based on your credit, income, and the property details. It’s important to not take out any new credit or close accounts during this time.

Step 6: Home Appraisal and Inspection

  • Home Appraisal: Your lender arranges an appraisal to determine the home’s value and ensure that it is not less than your purchase price.
  • Home Inspection: Independently, you and your real estate agent will arrange for a home inspection to identify any potential issues with the property. If any arise, you may be able to back out of your offer, request repairs, or renegotiate terms.
  • Walk-Through: You may request a final walk-through of the property.

Step 7: Mortgage Approval and Closing

  • Receive Approval: If the underwriting is successful, you will receive a mortgage approval and a closing date will be set.
  • Closing Day: You will sign a lot of paperwork, legally transferring the property ownership. You will be responsible for paying any closing costs or down payment costs not covered by loans and assistance. Closing often occurs 4-6 weeks after making an offer.
  • Get Your Keys: Once everything is signed and payments are made, you’ll receive the keys to your new home.
  • Keep Documents: Safely store all home purchase and mortgage documents for future reference.

As you navigate this long process, it’s important to keep in close contact with your lender and real estate agent, be prepared for potential delays or issues that might arise, and avoid major financial changes or large purchases until your home purchase has closed. 


Understanding Your New Monthly Mortgage Payment

One to two months after you’ve settled into your new home, your first mortgage payment will come due. You’ll likely receive a statement in the mail at first (unless you opt out of them), with explanations for how to set up recurring monthly payments. Setting this up right away can help you avoid late payments and simplify your money management.

So, what can you expect in your first payment? Your mortgage bill isn’t just one fee, it actually contains multiple parts:

  • Principal: The portion of the payment that goes towards paying off the loan amount borrowed. This portion of your loan will start small and increase over time.
  • Interest: Interest is charged on the loan and constitutes a significant portion of the early payments in a typical mortgage structure, but it will decrease little-by-little over the life of your loan.
  • Taxes: Taxes, determined by the local government, are often included in the mortgage payment and held in an escrow account. Taxes may go up over time as tax rates increase, even as the rest of your mortgage payment remains the same. 
  • Insurance: Homeowners insurance, which provides property damage coverage, is often included in the mortgage payment. This may also go up over time.
  • Other Fees: If you have a government-backed loan or a conventional loan that had less than a 20% down payment, you’ll also have some other fees. These may include private mortgage insurance (PMI), annual fees (broken down across 12 months), and down payment assistance second loan costs.

All these terms and requirements may feel complicated at first, but rest-assured that soon enough your mortgage payment will just be a part of your monthly routine.


Ready to Buy a Home? See How 1st Colonial Community Bank Can Help

We know that buying a home can be an overwhelming process. But owning your own home can be a life-changing experience and an important financial milestone, building wealth and stability for generations to come. 

At 1st Colonial we are well-versed in New Jersey and Pennsylvania first-time homebuyer and down payment assistance opportunities, and we offer a variety of options to help our local residents achieve their dreams of homeownership. When you partner with us, we’ll work one-on-one with you and your agent to find the right loans and assistance for your needs, ensuring a smooth and affordable closing and a monthly payment that fits into your budget.
Explore our Home Mortgage options including Conventional Mortgages, FHA Loans, VA Loans, and USDA Loans. Not sure where to start? Reach out to one of our qualified, local lenders in Southern New Jersey, South Eastern Pennsylvania, and the Greater Philadelphia area and we can help you find a mortgage that works for you.