Home Loans and Mortgages: What You Need to Know Before You Apply

Getting a mortgage comes down to two numbers more than anything else: your credit score and your debt-to-income ratio. Credit score determines which loan programs you qualify for and what interest rate you'll receive. Debt-to-income ratio determines how much the lender will let you borrow. Both are calculable before you ever speak to a lender, which means most people walk into the pre-approval process less prepared than they could be.

Debt-to-income ratio — DTI — compares your monthly debt obligations to your gross monthly income. Lenders look at two versions of it. Front-end DTI is your proposed housing costs (principal, interest, taxes, insurance) divided by gross monthly income. Back-end DTI is all debt obligations including housing, student loans, car payments, and credit card minimums. Most conventional lenders cap back-end DTI at 43%, though some allow up to 50% with strong compensating factors like a large down payment or significant assets. If you're carrying $1,200 in monthly debt obligations and earning $5,000 gross per month, your back-end DTI is 24% — well within range. If those monthly obligations total $2,400, you're at 48%, which restricts what programs will accept you.

The Four Main Loan Types

Conventional loans are not government-backed and follow guidelines set by Fannie Mae and Freddie Mac. The minimum credit score for a conventional loan is typically 620, though you need 740 or higher to access the best rate tiers. Down payments start at 3% through programs like Fannie Mae HomeReady, but anything below 20% requires private mortgage insurance, which adds to your monthly payment until you reach 20% equity. Conventional loans offer more flexibility on property types and loan amounts than government-backed programs.

FHA loans are insured by the Federal Housing Administration. The minimum credit score for a 3.5% down payment is 580. Scores between 500 and 579 require a 10% down payment. FHA loans are more accessible to borrowers with lower scores or less conventional employment histories, but they come with mortgage insurance premiums that are more expensive and harder to remove than conventional PMI. If you put less than 10% down on an FHA loan, you're paying MIP for the life of the loan — there's no cancellation at 20% equity the way there is with conventional PMI. For borrowers who will refinance or sell within a few years, this matters less. For long-term holders, the total MIP cost can be substantial.

VA loans are available to qualifying veterans, active-duty service members, and surviving spouses. They require zero down payment, have no private mortgage insurance, and typically carry competitive rates. There is a funding fee — a one-time charge that varies by loan amount and down payment — but it can be rolled into the loan. For borrowers who qualify, VA loans are generally the best deal available in the mortgage market. The eligibility requirements and entitlement system have some complexity, but the benefits make working through that complexity worthwhile.

USDA loans are backed by the U.S. Department of Agriculture and offer zero down payment for properties in eligible rural and suburban areas. Income limits apply — borrowers can't earn more than 115% of the area median income. USDA loans are underused primarily because of the geographic perception: people assume 'rural' means farmland, but large portions of suburban America qualify. If you're buying outside a major metro and your income is moderate, USDA is worth checking the geographic and income eligibility maps before assuming it doesn't apply.

Fixed vs. Adjustable Rate Mortgages

A fixed-rate mortgage locks your interest rate for the life of the loan — 15, 20, or 30 years. Your principal and interest payment never changes. Fixed-rate loans are predictable by design and make the most sense for borrowers planning to stay in the home long-term. The 30-year fixed is the dominant mortgage product in the United States, largely because it produces the lowest monthly payment for a given loan amount, even though it results in more total interest paid than a 15-year term.

An adjustable-rate mortgage starts with a fixed rate for an initial period, then adjusts periodically based on a benchmark index. A 5/1 ARM has a fixed rate for the first five years, then adjusts annually. ARMs carry lower initial rates than comparable fixed-rate loans, sometimes by 0.5 to 1.0 percentage points. That difference matters on large loan amounts. The risk: if rates rise significantly during the adjustment period, your payment increases. ARMs make financial sense if you have strong evidence that you'll sell or refinance before the adjustment window opens — a known move, a planned refinance, or a property held as a transitional purchase.

What Lenders Actually Evaluate

Beyond credit score and DTI, lenders evaluate loan-to-value ratio — LTV — which is the loan amount divided by the appraised value of the property. A $240,000 loan on a $300,000 home is an 80% LTV. Lower LTV is better: it means more equity, less risk to the lender, and no PMI requirement on conventional loans. Lenders also verify employment history (typically two years of consistent employment in the same field), income documentation (W-2s, tax returns, pay stubs), and liquid assets. The asset review confirms you have enough for the down payment, closing costs, and reserves — most lenders want to see 2 to 3 months of mortgage payments in reserve after closing.

Large recent deposits in your bank account — above roughly $1,000 — often require what lenders call a paper trail. A $10,000 deposit from selling a car needs documentation: the sale receipt, the buyer's check. A $5,000 gift from a parent needs a signed gift letter. Lenders don't disqualify these funds — they verify that the money isn't an undisclosed loan that would add to your liabilities. This documentation requirement catches people off guard when gathering materials before closing.

Down Payment: How Much You Actually Need

The 20% down payment isn't a requirement — it's the threshold at which you avoid PMI on a conventional loan. Programs exist for 3%, 3.5%, and zero down depending on loan type and qualification. Whether to wait for 20% down or buy sooner with a smaller down payment is a real financial question. PMI typically costs 0.5% to 1.5% of the loan amount annually — on a $300,000 loan, that's $1,500 to $4,500 per year. If home values in your area are rising faster than you can save, waiting for 20% could cost you more in home price appreciation than PMI would cost over the period you'd be paying it.

Closing costs add another 2% to 5% of the loan amount on top of the down payment. On a $300,000 loan, that's $6,000 to $15,000 in fees — origination fees, appraisal, title insurance, prepaid taxes and insurance, and others. Some lenders offer 'no-closing-cost' loans where fees are rolled into the rate or the loan balance. This is a legitimate option for buyers who are short on cash at closing, but it increases the total cost of the loan. Model it both ways before deciding.

Rate Shopping and Pre-Approval

Shopping multiple lenders for the best mortgage rate is worthwhile — even a 0.25% difference on a 30-year $300,000 mortgage saves roughly $15,000 over the life of the loan. Multiple mortgage inquiries within a 14 to 45-day window are treated as a single inquiry by FICO's scoring model, so rate shopping doesn't compound the credit score impact. Pull quotes from at least three lenders: a large bank, a regional bank or credit union, and an online lender. The variation in rates, fees, and points can be meaningful.

Pre-approval is stronger than prequalification. Prequalification is based on self-reported information and carries no weight with sellers. Pre-approval means the lender has verified your income, assets, and credit and is conditionally committed to lending you a specific amount. In competitive markets, sellers won't consider offers without a pre-approval letter. Get pre-approved before starting your home search — not because it's required, but because knowing your actual borrowing power shapes what you look at and prevents wasting weeks pursuing homes outside your range.