The price on the listing is almost never the number that matters. Financing a house is about what the monthly payment does to your life for the next 30 years, and that number depends on far more than the sticker price. Here's how to think about it.
What You're Actually Buying
When lenders talk about "the payment," they mean PITI: principal, interest, taxes, and insurance. Miss any one of those and your affordability math is off, sometimes by hundreds of dollars a month.
- Principal & Interest. What the loan calculator shows you. This is the only line buyers typically fixate on.
- Property taxes. Can range from 0.3% of home value annually (Hawaii, Alabama) to over 2% (New Jersey, Illinois, parts of Texas and Connecticut). On a $500,000 home that's a $9,000+ annual swing.
- Homeowners insurance. $1,200 to $4,000/year depending on state, coverage, and catastrophe exposure. Florida, Louisiana, and California coastal markets are now 3 to 5x the national median.
- PMI. If you put less than 20% down on a conventional loan, expect an extra 0.3 to 1.5% of the loan amount per year until you reach 80% LTV.
- HOA dues. Not technically PITI, but lenders count them against your ratios. Condo and planned-community fees can add $200 to $800/month.
The 28/36 Rule (And Why It's Gentler Than It Sounds)
The classic affordability rule: your housing payment (PITI) shouldn't exceed 28% of gross monthly income, and your total debt payments shouldn't exceed 36%. Lenders will often approve you well above these thresholds, up to 45 to 50% DTI on conventional loans, higher on FHA, but approval isn't the same as affordability.
Being "house poor" is a real and expensive condition. Pushing DTI to 43% leaves almost nothing for retirement savings, emergency reserves, or life. Work backward from the lifestyle you want, not the maximum the bank will lend you.
Down Payment: More Than Just 20%
The mythology around 20% down is partly outdated. You don't need it to buy a house. What you need to understand is the tradeoff:
- 3 to 5% down (conventional low-down-payment programs, Fannie Mae HomeReady, Freddie Mac Home Possible). Gets you in the door, costs you PMI.
- 3.5% down (FHA). Flexible credit requirements, but the upfront and annual mortgage insurance premiums stick for the life of the loan on most current FHA loans unless you refinance out.
- 0% down (VA for eligible veterans, USDA for rural properties). No down payment, no monthly PMI. A funding fee applies to VA.
- 10 to 15% down. Still requires PMI, but at a meaningfully lower rate than 3% down.
- 20% down. No PMI, lowest rate available, strongest offer in competitive markets.
In a fast-appreciating market, waiting several years to save 20% can cost more in lost appreciation than you'd pay in PMI over the same period. In a flat or declining market, the math flips. There is no universal right answer.
Closing Costs and Reserves: The Numbers Everyone Forgets
Budget 2 to 5% of the purchase price for closing costs: lender origination, title insurance, appraisal, recording fees, prepaid escrows, and taxes. On a $400,000 home that's $8,000 to $20,000, due at closing, in addition to the down payment.
Lenders also want to see 2 to 6 months of reserves, liquid assets equal to several months of PITI, after closing. If you drain every account to close, underwriting may push back or deny.
Loan Types: A Quick Map
Pick the one that fits your situation, not the one your loan officer quotes first:
- Conventional fixed (30-year). The default. Predictable, widely available, most competitive rate for buyers with 700+ credit and solid down payment.
- Conventional fixed (15-year). Rate ~0.5 to 0.75% lower, but the payment is dramatically higher. Best if you can afford it and want to build equity fast.
- ARM (5/6, 7/6, 10/6). Fixed for the first 5/7/10 years, then adjusts. Makes sense if you plan to move or refinance inside the fixed window.
- FHA. Credit scores as low as 580, 3.5% down, but lifetime MIP on most new loans. Think of it as a starter loan you refinance out of.
- VA. The strongest loan in the market for anyone eligible. 0% down, no PMI, competitive rates, lenient on DTI.
- Jumbo. Above the conforming loan limit ($806,500 in most counties for 2025, higher in high-cost areas). Stricter credit and reserve requirements.
Pre-Approval vs. Pre-Qualification
Pre-qualification is a conversation. Pre-approval is a credit pull, income verification, and an underwriter's conditional commitment. In most competitive markets, sellers will not seriously consider an offer without a pre-approval letter. Get one before you shop, not after you find the house.
Shopping Rates: Do It Fast, Do It Right
Credit bureaus treat multiple mortgage inquiries within a 14 to 45 day window as a single inquiry. Use that: collect three or more Loan Estimates on the same day, compare them line by line, and negotiate. A 0.25% rate difference on a $400,000 loan is roughly $20,000 over 30 years.
Compare APR, not just the headline rate. APR folds in origination fees, points, and most lender costs, and is the only apples-to-apples number on the Loan Estimate.