Down Payment Requirements

• Conventional mortgages involve a purchaser making a down payment of at least 20 percent, but there are low cost options for first-time home buyers that involve reduced down payments. The Federal Housing Administration works with lenders to provide loans requiring down payments of just 3 1/2 percent. The Department of Veterans Affairs works with lenders to provide no-down payment loans to members of the armed services as well as the Coast Guard and some reservists. Choose the program that has an affordable down payment.
  
  

Private Mortgage Insurance

• Low down payment loans usually require private mortgage insurance, and the buyer must pay for it. On FHA loans, the buyer must pay a year's worth of premiums upfront. The insurance protects the lender in the event that you default on the loan, and most lenders require PMI if the buyer makes a down payment of less than 20 percent. PMI varies based on the price of the home, but the upfront premium typically costs between 1 1/4 and 2 1/2 percent of the purchase price.
  
  

Monthly Cost

• Lenders examine the income of prospective borrowers and typically do not approve loans with mortgage payments exceeding 30 percent of the borrowers gross monthly income. Overall debt payments cannot exceed 43 percent of a borrowers gross income. The mortgage payment includes property tax and hazard insurance, which varies greatly from state to state. Insurance costs are very high in coastal areas and places that endure weather extremes. You can get rate quotes from insurance agents prior to buying a home and use the quotes to estimate your monthly bill. Additionally, property tax records are stored among public records in county courthouses, so you can view existing tax records online to get an idea of the monthly cost.
  
  

Other expenses

• Borrowers must pay for home appraisals that normally cost between $200 and $400. Home inspections that cost upwards of $200 are recommended, though not required, and are another out-of-pocket upfront expense for the buyer. Every lender must provide you with a good faith estimate that details lender charges before processing your application. Lenders often charge origination fees equal to 1 percent of the loan amount as well as other smaller fees for processing your application.
  
  

Review the Numbers

• Having reviewed the costs involved in terms of down payments, closing costs and monthly payments you must review your own budget to determine how much house you can afford. The Internal Revenue Service allows first-time home buyers to make penalty free withdrawals from an Individual Retirement Account of up to $10,000 for use as a down payment on a home. You can also use money gifted from a relative to make a down payment on an FHA loan. However, take into account that once you buy the home, you must decorate it and maintain it. Do not plan to spend all of your cash on closing costs and the down payment. Additionally, do not get the maximum monthly payment that you can afford, because you may need surplus funds to cover other expenses such as utility bills.