Your First Mortgage: What to Sort Out Before You Even Look at Houses

My cousin and his wife spent four months touring open houses before they checked their own credit. They found the right place, put in an offer, and then discovered their scores were 40 points lower than they'd assumed, which pushed their rate up by roughly half a percent. That half point worked out to about $90 extra per month on a $350,000 loan, or roughly $32,000 over 30 years. They still bought the house. They just paid for the mistake in installments.

A mortgage is a loan where the house itself is the collateral. You make monthly payments over a set term, usually 15 or 30 years, and if you stop paying, the lender can take the property. The payment covers principal and interest, plus escrowed amounts for property taxes and homeowners insurance. Most lenders want those four pieces to fit inside your budget before they approve anything.

The two numbers that set your rate

Your credit score and your debt-to-income ratio do most of the work. Lenders price risk: a 760 score typically earns a better rate than a 680, and the difference can be bigger than people expect. The debt-to-income ratio, your monthly obligations divided by gross monthly income, usually needs to sit at or below 43% for a conventional loan, though 36% or lower makes underwriting smoother. Neither number is mysterious. You can pull your credit report for free, and the DTI math is simple enough to do on a napkin.

You don't need 20 percent down

The 20% down payment rule gets repeated like law, but it's really just the threshold where private mortgage insurance disappears. FHA loans accept 3.5% down. Conventional loans can go as low as 3% through programs like HomeReady or the conventional 97. The tradeoff is PMI, typically 0.5% to 1% of the loan amount per year, which you can usually drop once you've built 20% equity. Paying less down means a higher monthly bill, so the right answer depends on whether you have the cash or you'd rather keep it.

Closing costs are not a rounding error

Plan for 2% to 5% of the purchase price in closing costs: appraisal, title search, origination fees, escrow deposits. On a $300,000 home, that's $6,000 to $15,000 on top of the down payment. Buyers who spend every dollar on the down payment often get blindsided here. Keep a separate buffer, or ask the seller to cover part of the costs as a concession.

1. Check your credit reports and dispute anything wrong at least six months before you apply.
2. Get pre-approved, not just pre-qualified, so you know your real ceiling.
3. Compare rate quotes from at least three lenders, including a credit union.
4. Lock your rate once you have an accepted offer.
5. Read the loan estimate line by line before closing.

None of this is glamorous, but the paperwork is where first-time buyers lose money. The house hunt is the fun part. The financing is where the actual decisions get made.