How much house can I afford?

A common guideline is the 28/36 rule: your housing costs (PITI) should not exceed 28% of gross monthly income, and total debt payments should not exceed 36%. With a $6,000/month gross income, aim for a maximum housing payment of $1,680/month. Use a mortgage calculator with current rates to find the loan amount that produces this payment.

What is a good debt-to-income ratio for a mortgage?

For conventional mortgages, lenders prefer a back-end DTI of 43% or less (total monthly debts ÷ gross monthly income). Below 36% is considered excellent. FHA loans may approve up to 57% DTI in some cases. The lower your DTI, the more favorable terms and rates you're likely to receive.

Do I need a 20% down payment?

No. Conventional loans allow as little as 3% down, and FHA loans require 3.5% down. The 20% threshold matters because below it, you'll pay Private Mortgage Insurance (PMI) on conventional loans, adding 0.5–1.5% of the loan amount per year to your cost. The trade-off of PMI vs. waiting to save 20% depends on home price appreciation, rent costs, and your timeline.

What is PMI and how do I get rid of it?

PMI (Private Mortgage Insurance) protects the lender if you default. It's required on conventional loans with less than 20% down. The Homeowners Protection Act requires lenders to automatically cancel PMI when your loan balance reaches 78% of the original purchase price. You can also request cancellation at 80% loan-to-value with a good payment history. FHA mortgage insurance requires refinancing to remove.

Should I get a 15 or 30-year mortgage?

A 15-year mortgage saves a tremendous amount in interest (often $150,000–300,000+ on a $300,000 loan) and has a lower interest rate, but requires a monthly payment roughly 30–40% higher. Choose a 15-year if you can comfortably afford the payment and want to build equity fast. Choose a 30-year if you need payment flexibility, plan to invest the payment difference, or are buying at the top of your budget.

Complete Mortgage Guide: Calculate Payments, Rates & Affordability

How Mortgages Work

A mortgage is a loan secured by real estate. The lender advances funds to purchase the property, and the borrower repays the principal plus interest over the loan term (typically 15 or 30 years). Monthly payments include principal (loan balance reduction), interest, property taxes (usually escrowed), and homeowner's insurance. The total payment is often abbreviated as PITI: Principal, Interest, Taxes, and Insurance.

The interest portion of each payment is highest at the start of the loan (front-loaded) and decreases over time as the principal balance falls. This is called amortization. In the early years of a 30-year mortgage, over 70% of each payment goes toward interest.

Down Payment Requirements

The down payment is the portion of the home purchase price paid upfront (not financed). Different loan programs have different minimum requirements:

Conventional loans: Minimum 3–5% down for first-time buyers; 20% to avoid Private Mortgage Insurance (PMI)
FHA loans: 3.5% down with a credit score of 580+; 10% down with scores 500–579. Requires both upfront and annual mortgage insurance premiums.
VA loans (veterans): 0% down for eligible veterans and active-duty service members. No PMI.
USDA loans (rural areas): 0% down for income-qualifying buyers in eligible rural areas. Annual guarantee fee applies.

Private Mortgage Insurance (PMI)

When a conventional loan has less than 20% down, lenders require PMI to protect against default. PMI typically costs 0.5–1.5% of the loan amount per year, added to your monthly payment. On a $300,000 loan, that's $125–375 per month. PMI can be removed once the loan-to-value ratio reaches 80% (either through paying down the principal or appreciation in home value). FHA loans require mortgage insurance for the life of the loan (unless refinanced).

Fixed-Rate vs. Adjustable-Rate Mortgages (ARM)

Fixed-rate: Interest rate stays the same for the entire loan term. Monthly P&I payment is predictable and never changes. Best choice when interest rates are low or you plan to stay in the home long-term.
Adjustable-rate (ARM): Rate is fixed for an initial period (typically 5, 7, or 10 years), then adjusts annually based on a market index. An ARM is expressed as 5/1, 7/1, etc. (fixed years/adjustment period). Lower initial rate than fixed, but risk of payment increases after the fixed period. Best when you plan to sell or refinance before the adjustment period begins.

15-Year vs. 30-Year Mortgage

The most common mortgage term comparison:

30-year fixed: Lower monthly payment (by about 30–40% vs. 15-year). Total interest paid is roughly 2–3× more than a 15-year at the same rate. More flexibility — extra payments can be made to pay off faster, but minimum payment is lower.
15-year fixed: Higher monthly payment but roughly 0.5–0.75% lower interest rate. Builds equity twice as fast. Total interest cost is dramatically lower. Better choice if the higher payment is affordable.

Example: $300,000 loan at 7.0% (30-year) vs 6.25% (15-year): 30-year payment = $1,996/month, total interest = $418,560. 15-year payment = $2,573/month (+$577/month), total interest = $163,140 — saving $255,420 in total interest.

Debt-to-Income Ratio (DTI)

Lenders use your DTI ratio to assess ability to repay. DTI is calculated as total monthly debt payments ÷ gross monthly income. Two DTI ratios matter:

Front-end DTI: Housing costs (PITI) ÷ gross income. Most lenders want this below 28–31%.
Back-end DTI: All monthly debt (housing + car + student loans + credit cards) ÷ gross income. Maximum for conventional loans is typically 45%; FHA allows up to 57% in some cases.

Closing Costs

Beyond the down payment, budget for closing costs of 2–5% of the loan amount. Common closing costs include lender origination fee, appraisal, title insurance, title search, survey, property taxes proration, homeowner's insurance prepayment, and escrow setup. On a $300,000 purchase, closing costs run $6,000–15,000. Some lenders offer "no-closing-cost" options by rolling fees into the rate.

How to Improve Mortgage Approval Odds

Pay down revolving debt to lower your DTI and credit utilization ratio
Avoid new credit inquiries for 6 months before applying
Keep a stable job history (2+ years at same employer is preferred)
Save documentation: 2 years tax returns, W-2s, 2 months bank statements, pay stubs
Check and dispute any errors on your credit report before applying