Start by knowing what you can actually afford to borrow

Before you look at a single house, find out what monthly payment you can handle. Most lenders will let you borrow up to 28 percent of your gross monthly income for a mortgage payment alone, or up to 43 percent when you add in other debts like car loans and credit cards. If you make $3,000 a month gross, that means a mortgage payment around $840 is usually the ceiling.

The real number that matters, though, is what you can afford after taxes, food, insurance, and everything else. A lender's math and your household's math are different things. Sit down with your last three months of bank statements and add up what you actually spend. Subtract that from what you actually take home. That leftover number is what you have room for.

You can also use an online mortgage calculator to see how different loan amounts translate to monthly payments. Plug in a few scenarios — a $150,000 loan, a $200,000 loan — and see which one leaves you breathing room. This takes 10 minutes and tells you whether you are in the market for a $200,000 house or a $350,000 house.

Key Takeaways

  • Your affordable monthly payment is roughly 28 percent of your gross monthly income, but your actual household budget is the real limit.
  • Down payment requirements range from zero to 20 percent depending on the loan type, and a smaller down payment means a higher monthly payment.
  • Saving for closing costs — usually 2 to 5 percent of the purchase price — is as important as saving for a down payment.
  • Your credit score affects the interest rate you receive, so checking your score and fixing errors before you explore can save you thousands over the life of the loan.
  • First-time homebuyer programs in your state or county may offer down payment help, lower interest rates, or both.

Understand the difference between down payment and closing costs

A down payment is the money you hand over on the day you buy the house. Closing costs are the fees you pay to the lender, the title company, the appraiser, and others involved in the sale. Many people save for one and forget about the other, then run out of money before closing day.

Down payment amounts vary by loan type. A conventional loan typically requires 5 to 20 percent down. An FHA loan (Federal Housing Administration) requires as little as 3.5 percent. A VA loan (if you are a veteran) or a USDA loan (if you are buying in a rural area) may require zero down. A smaller down payment means you borrow more, so your monthly payment goes up and you pay more interest over time.

Closing costs usually run 2 to 5 percent of the purchase price. On a $200,000 house, that is $4,000 to $10,000. These costs cover the appraisal, title search, title insurance, loan origination, inspections, and recording fees. Ask a lender for a Loan Estimate form — they are required to give you one within three business days of your process — and it will show you the exact closing costs for your situation.

Check your credit score and fix errors before you explore

Your credit score determines the interest rate you receive. A score of 620 might get you 7 percent interest, while a score of 740 might get you 5.5 percent. On a $200,000 loan, that difference adds up to tens of thousands of dollars over 30 years. Checking your score now, before you explore, gives you time to improve it.

You can check your credit score for free through AnnualCreditReport.com, which is the official government site. You are may have access to to one free report per year from each of the three credit bureaus — Equifax, Experian, and TransUnion. Look for errors: accounts you did not open, payments marked late when you paid on time, or balances that are wrong. If you find an error, dispute it with the bureau in writing. Fixing errors can take a few months, so start now.

If your score is low because of missed payments or high credit card balances, you have options. Paying down credit card balances lowers the percentage of your available credit you are using, which helps your score. Paying bills on time for the next few months also helps. You do not need a perfect score to get a mortgage — 620 is often the minimum — but every point helps your rate.

Research first-time homebuyer programs in your area

Most states and many counties run programs that help first-time buyers with down payments, closing costs, or both. Some offer a lower interest rate. Some offer a grant you do not have to repay. Some offer a second loan at zero percent interest that you repay only when you sell the house. The programs vary widely by location, so you have to look at what is available where you live.

Start by searching "[your state] first-time homebuyer program" or "[your county] down payment information." You can also contact your state housing finance agency — each state has one — and ask what programs exist. The National Council of State Housing Agencies has a directory at ncsha.org. Many programs have income limits, so you may not be may be able to access if you earn above a certain amount, but some have no income limit at all.

Some programs require you to take a homebuyer education course, usually offered online or in person by nonprofits. The course covers budgeting, credit, the mortgage process, and home maintenance. It takes 4 to 8 hours and is free or low-cost. Completing it often unlocks access to the program or lowers your interest rate.

Build your down payment savings in a separate account

Open a savings account separate from your checking account and set up an automatic transfer every payday. Even $100 or $200 per paycheck adds up. If you move $150 every two weeks, you will have $3,900 in a year. If you move $300, you will have $7,800. The automatic transfer means you do not have to think about it — the money moves before you spend it.

Keep this money in a regular savings account, not in stocks or investments. You need it to be there when you are ready to buy, and the stock market can go down. A high-yield savings account pays a little more interest than a regular savings account — currently around 4 to 5 percent annually at many banks — so your money grows slightly while you save.

Do not touch this account for anything else. If you raid it for a car repair or a vacation, you start over. If you cannot save without dipping in, you may not be ready to buy yet. Homeownership comes with unexpected costs — a roof leak, a furnace that dies — and you need to be able to handle those without going into debt.

Get pre-approved for a mortgage to know your real budget

Pre-approval is different from pre-qualification. Pre-qualification is a rough estimate based on what you tell a lender. Pre-approval means a lender has checked your credit, verified your income, and confirmed they will lend you a specific amount. Pre-approval takes a few days and involves paperwork, but it tells you exactly how much you can borrow.

When you get pre-approved, the lender gives you a pre-approval letter that you can show to a real estate agent or a seller. It says "we will lend this person up to $X." This letter does not lock you into that lender — you can shop around and compare offers from other lenders — but it shows sellers you are serious and have already cleared the credit and income hurdles.

Pre-approval also reveals costs you may not have thought about. The lender will tell you the interest rate they can offer you, the closing costs, and whether you will need to pay private mortgage insurance (PMI). PMI is insurance the lender requires if your down payment is less than 20 percent. It protects the lender if you default, but you pay for it. Knowing this upfront helps you decide whether to save longer for a bigger down payment or move forward with a smaller one.

Decide whether to buy now or wait and save longer

There is no single right answer. Buying now with a smaller down payment means a higher monthly payment and PMI, but you start building equity instead of paying rent. Waiting to save more means a lower monthly payment and no PMI, but you pay rent in the meantime and house prices may go up.

The math depends on your situation. If you are paying $1,200 a month in rent and a mortgage would be $1,100 a month plus $150 in PMI, buying now might make sense. If rent is $800 and a mortgage would be $1,300, waiting makes more sense. Use a rent-versus-buy calculator — many are free online — and plug in your numbers. It will show you the break-even point: how many years until buying costs less than renting.

Also consider your stability. If your job is find and you plan to stay in the area for at least five years, buying is more likely to work out. If you might move or lose your job, renting gives you flexibility. Buying a house is a long-term commitment, and a tight budget makes it riskier. Make sure you are ready.

Frequently Asked Questions

How much should I have saved before I talk to a lender?

You should have your down payment saved and ideally some extra for closing costs and emergencies. If you are getting a first-time homebuyer loan with 3.5 percent down, you need at least that much. Having 5 to 10 percent saved shows lenders you are serious and gives you a cushion if something unexpected comes up.

Does my spouse's income count if we are not married?

No. Only income from people whose names will be on the loan counts. If you are buying with a partner you are not married to, you can both be on the loan and both incomes count, but you both have to be on the deed and both are responsible for the debt.

What if I have student loans or other debt?

Lenders look at your debt-to-income ratio, which includes all monthly debt payments — car loans, credit cards, student loans, everything. The higher your other debt, the less the lender will let you borrow for a mortgage. Paying down other debt before you buy increases your borrowing power.

Can I use a gift from family for my down payment?

Yes, most lenders allow down payment gifts from family members. You will need a gift letter from the person stating the money is a gift, not a loan, and that they do not expect repayment. The lender wants to make sure you are not borrowing the down payment, which would increase your debt.

What happens if I lose my job after I get pre-approved?

Pre-approval is not final. Lenders do a final check right before closing, and if your employment situation has changed, they may withdraw the pre-approval or change the terms. Tell your lender when ready if your job changes. Some lenders are more flexible than others, and some loan types are stricter about employment history.