Buying your first home is the largest financial decision most people will ever make. Mortgage rates, down payment size, credit scores, closing costs, PMI — there's a lot to understand before you sign anything. This guide walks through the essentials so you can approach the process with realistic expectations.
Step 1: Know Your Numbers Before You Shop
The 28/36 Rule
Most lenders use this guideline to assess affordability:
- 28%: Monthly housing costs (mortgage + taxes + insurance + HOA) should not exceed 28% of gross monthly income
- 36%: Total debt payments (housing + car + student loans + credit cards) should not exceed 36% of gross monthly income
Example: $80,000 gross income = $6,667/month
Max housing payment: $6,667 × 28% = $1,867/month
Max total debt: $6,667 × 36% = $2,400/month
How Much House That Buys in 2026
With the 30-year fixed rate averaging around 6.5–7.0% in 2026, a $1,867/month budget (excluding taxes and insurance) supports a loan of approximately $280,000–$295,000. Adding a 10% down payment gets you into a $310,000–$325,000 home.
Use our mortgage calculator to plug in your exact numbers and see the full monthly breakdown.
Step 2: Down Payment — How Much Do You Actually Need?
| Loan Type | Min. Down Payment | Key Notes |
|---|---|---|
| Conventional | 3% | PMI required until 20% equity; best rates at 20%+ |
| FHA Loan | 3.5% | Requires 580+ credit score; MIP for life of loan |
| VA Loan | 0% | Military/veterans only; no PMI |
| USDA Loan | 0% | Rural/suburban areas; income limits apply |
The 20% myth: You don't need 20% down. The advantage of 20% is avoiding PMI (private mortgage insurance, typically 0.5–1.5% of the loan per year). But tying up 20% of a home's value can leave you house-rich and cash-poor. Many financial advisors suggest 10% down if you have other financial priorities (emergency fund, retirement contributions).
Step 3: Credit Score Requirements
| Credit Score | Loan Options | Rate Premium |
|---|---|---|
| 760+ | All loan types, best rates | None |
| 700–759 | All conventional loans | +0.1–0.3% |
| 640–699 | Conventional, FHA | +0.3–0.75% |
| 580–639 | FHA only (3.5% down) | +0.75–1.5% |
| Below 580 | Very limited options | +2%+ |
On a $300,000 loan, a 1% rate difference costs approximately $56,000 in extra interest over 30 years. Improving your score before applying is one of the highest-leverage moves a first-time buyer can make.
Step 4: Don't Forget Closing Costs
Closing costs are the fees paid at settlement — typically 2–5% of the loan amount. On a $300,000 purchase, that's $6,000–$15,000 due at closing in addition to your down payment.
Common closing costs:
- Loan origination fee: 0.5–1% of loan
- Appraisal: $400–$700
- Title insurance: $500–$1,500
- Attorney fee (required in some states): $500–$1,500
- Prepaid property tax and homeowner's insurance escrow: varies
Some sellers will contribute to closing costs as part of negotiation. This is more common in buyer-friendly markets.
Step 5: Get Pre-Approved Before You Shop
A pre-approval letter tells sellers you're serious and have verified financing. Without one, many listing agents won't take your offer seriously in competitive markets.
Pre-approval requires:
- 2 years of tax returns (W-2s or 1099s)
- 2–3 months of bank statements
- Recent pay stubs
- Credit check (soft pull for estimates, hard pull for full approval)
Get pre-approved by 2–3 lenders. Compare the Loan Estimate forms they provide (lenders are required by law to give you these). Even a 0.25% difference in rate saves thousands over the life of the loan.
Key Takeaways
- Housing costs should stay under 28% of gross monthly income
- You don't need 20% down — 3–10% is common for first-time buyers
- Credit score of 700+ gets you the best conventional rates
- Budget an extra 2–5% of the loan for closing costs
- Get pre-approved by multiple lenders and compare Loan Estimates