Buying your first home: what banks actually look at
Key takeaways
04 · ideas- DTI above 43% disqualifies most buyers — fix debts before applying
- 20% down eliminates PMI, but 3–5% programs exist for first-time buyers
- Getting pre-approved before house hunting is non-negotiable in competitive markets
- Multiple rate shopping within 14–45 days counts as a single credit inquiry
Basic level
The essentials · 1 min
The mortgage process feels opaque, but lenders are actually looking at four specific things. Understanding each one tells you exactly what to fix before you apply.
The four pillars of mortgage approval:
- Credit score — determines whether you qualify and at what rate
- Debt-to-income ratio (DTI) — determines how much house you can afford
- Down payment — determines your loan size, rate, and whether you pay PMI
- Employment history — lenders want 2 years of stable income
- Credit score: 620 minimum, 740+ for best rates
- DTI: 43% maximum back-end (all debts ÷ income)
- Down payment: 3% minimum (first-time buyer programs)
- Employment: 2 years same employer or same field preferred
Intermediate level
How it applies · 3 min
Step 1: Fix your DTI before anything else
Your back-end DTI is the most important and least understood factor. It's calculated as:
(Monthly housing payment + all other monthly debt minimums) ÷ gross monthly income
If you earn $7,000/month and have $600 in car and student loan payments, you have $600 already counted. At 43% DTI maximum:
$7,000 × 0.43 = $3,010 total debt capacity
$3,010 − $600 existing = $2,410 available for housing (PITI)
If you also spend $350/month on housing taxes and insurance:
$2,410 − $350 = $2,060 maximum P&I payment
At 7.5% for 30 years, $2,060/month supports approximately a $293,000 loan.
The fastest way to increase your purchase power: pay off the highest minimum payment debt first. A $400/month car payment eliminated adds $400/month of housing capacity — which at current rates adds roughly $57,000 to your maximum loan.
Step 2: Know your down payment options
| Program | Down payment | PMI | Credit min | Who qualifies |
|---|---|---|---|---|
| Conventional 97 | 3% | Yes (removable at 80% LTV) | 620 | First-time buyers |
| FHA | 3.5% | Yes (life of loan) | 580 | Anyone |
| Conventional 20% | 20% | No | 620 | Anyone |
| VA | 0% | No | 580 | Military/veterans |
| USDA | 0% | Yes (low rate) | 640 | Rural areas |
The PMI math: On a $300,000 loan with 5% down, PMI adds approximately $150–250/month until you reach 20% equity. That's $1,800–3,000/year — a real cost to weigh against a smaller down payment.
First-time buyer programs: Most states have down payment assistance programs that provide grants or low-interest loans for the down payment. These are often income-capped but significantly underused. Search "[your state] first time homebuyer program" — many buyers who qualify never apply.
Step 3: Get pre-approved, not just pre-qualified
These sound similar but are completely different:
Pre-qualification: You tell a lender your income and debts. They give you a rough estimate. No verification. Takes 10 minutes. Means almost nothing to a seller.
Pre-approval: The lender verifies income (pay stubs, W-2s, tax returns), pulls your credit, and issues a written commitment for a specific loan amount. Takes 1–3 days. Required in most competitive markets to make a serious offer.
Get pre-approved before looking at homes. Two reasons: you'll know exactly what you can afford, and when you find the right home you can make an offer immediately.
Rate shopping strategy: Get pre-approved by 2–3 lenders within the same 14–45 day window. Multiple mortgage inquiries in that period count as a single hard inquiry on your credit report. Even a 0.25% rate difference on a $300,000 loan saves $15,000 over 30 years.
Advanced level
The math, step by step · 2 min
The costs buyers forget about
The down payment is not your only upfront cost. Plan for:
Closing costs: 2–5% of the loan amount, paid at closing. On a $300,000 loan: $6,000–15,000. Includes origination fee, appraisal, title insurance, attorney fees, prepaid taxes and insurance. Can sometimes be negotiated as "seller concessions" — the seller pays your closing costs in exchange for a slightly higher purchase price.
Inspection: $400–600. Always get one. Never waive it. The inspection isn't just about finding deal-breakers — it's your negotiating tool. Serious issues found during inspection can be repaired by the seller or deducted from the purchase price.
Cash reserves: Most lenders want to see 2–3 months of mortgage payments in savings after closing. This is separate from your down payment and closing costs.
The true monthly cost:
| Component | Estimate |
|---|---|
| Principal + Interest | $1,996 |
| Property tax (1.2%) | $300 |
| Homeowner's insurance | $100 |
| PMI (if < 20% down) | $150 |
| HOA (if applicable) | $0–500 |
| **Total PITI** | **$2,546–3,046** |
The P&I payment is what a calculator shows. The total PITI is what you actually pay every month. Lenders use PITI to calculate your housing ratio — which should stay below 28% of gross income.
The crossover point: In most markets today (with rates above 7%), renting is cheaper than buying in the short term. The break-even where buying starts winning is typically 5–7 years. If there's any chance you'll move in under 5 years, the math usually favors renting — even if rents continue rising.