Buying your first home is one of the largest financial commitments you will make, and the mortgage is usually the biggest piece of it. A mortgage is a secured loan: the home serves as collateral, which is why lenders can offer lower rates than on unsecured debt like credit cards. Understanding how lenders evaluate you, what the loan actually costs, and which programs fit your situation will help you borrow responsibly rather than simply borrowing the maximum you qualify for.
How Lenders Decide What You Can Borrow
Most US lenders underwrite conventional and government-backed loans using standards set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy loans from lenders. Three numbers matter most:
- Credit score. Your FICO or VantageScore drives your interest rate. Conventional loans generally want a 620 minimum, while FHA loans allow scores as low as 500 with a 10% down payment (580 for 3.5% down). Higher scores earn meaningfully lower rates.
- Debt-to-income ratio (DTI). This is your total monthly debt payments divided by gross monthly income. Many conventional approvals top out around 43%–50% DTI, though automated underwriting can stretch further with compensating factors such as reserves.
- Loan-to-value ratio (LTV). The loan amount divided by the home's appraised value. A higher LTV usually means mortgage insurance and a higher rate.
Before shopping, pull your credit reports from AnnualCreditReport.com and dispute errors. Even a small correction can move your score and your rate.
Comparing Loan Types
There is no single best mortgage — only the best fit for your down payment, credit profile, and how long you plan to stay.
- Conventional loans. Not government-insured. Down payments as low as 3% for qualifying first-time buyers; private mortgage insurance (PMI) typically applies below 20% down and can often be removed once you reach 20% equity.
- FHA loans. Insured by the Federal Housing Administration. Low down payments and flexible credit standards, but mortgage insurance premiums usually last for the life of the loan if you put down less than 10%.
- VA loans. For eligible veterans, active-duty service members, and surviving spouses. Often 0% down with no monthly mortgage insurance, though a funding fee applies.
- USDA loans. For eligible rural areas, with 0% down for qualifying buyers.
Fixed-rate mortgages lock your rate for the full term — typically 30 or 15 years. Adjustable-rate mortgages (ARMs) start lower but reset after an initial period, which adds risk if you stay past the fixed window.
Down Payments, Closing Costs, and Reserves
The down payment is only part of the cash you need. Closing costs — lender fees, title insurance, appraisal, recording fees, and prepaid taxes and insurance — generally run 2%–6% of the purchase price. Sellers can sometimes cover a portion, and lender credits can offset costs in exchange for a higher rate.
Plan for reserves as well. Lenders often want two months of mortgage payments in savings after closing, and you will want a separate emergency fund for maintenance. A common guideline is to budget 1%–3% of the home's value annually for repairs and upkeep.
Getting Preapproved and Shopping Rates
Preapproval is a lender's conditional commitment based on verified income, assets, and credit. It tells sellers you are a serious buyer and clarifies your true budget. Gather recent pay stubs, W-2s, tax returns, bank statements, and documentation of any gift funds, which usually require a gift letter.
Compare at least three Loan Estimates from different lenders on the same day if possible. Mortgage rates move daily, and the difference between offers is often in the fees, not just the rate. Ask each lender for the APR, which bundles the rate with most fees, and confirm whether points are being charged. Note that a hard credit inquiry for a mortgage has a shopping window — inquiries within a focused period are generally treated as one inquiry by scoring models.
Protecting Your Long-Term Financial Health
A mortgage should support your broader financial plan, not strain it. Keep total housing costs — principal, interest, taxes, insurance, and any HOA dues — within a range you can sustain through a job change or unexpected expense. Avoid draining your savings for the down payment, and do not open new credit accounts or make large transfers during underwriting, since lenders recheck your profile before closing.
What to Remember
- Your credit score and DTI drive both approval and your interest rate — check both before you shop.
- Compare conventional, FHA, VA, and USDA options against your down payment and timeline.
- Budget for closing costs and reserves, not just the down payment.
- Get preapproved, then compare Loan Estimates and APRs from multiple lenders.
- Borrow an amount you can comfortably repay, not the maximum you qualify for.