What you can borrow is not what you should
Lenders underwrite to two ratios. The front-end ratio is housing costs as a share of gross monthly income, commonly capped near 28%. The back-end ratio is all debt payments as a share of gross income, commonly capped near 36% and stretched to 43% or beyond on some programmes.
Note "gross". The ratios ignore tax, retirement contributions, childcare, healthcare premiums and every other commitment you have. An approval is a statement about default risk, not about whether your life will still work.
A more useful personal test: take your net monthly pay, subtract everything you actually spend, and see what remains. If the full housing cost — not just principal and interest — consumes most of it, the approval is optimistic.
Model the full figure in the mortgage calculator, which includes tax, insurance, PMI and HOA rather than just the loan.
How much deposit you actually need
The 20% figure is not a requirement; it is the threshold at which private mortgage insurance stops being charged.
- Conventional: as little as 3% for qualifying first-time buyers, with PMI below 20%.
- FHA: 3.5% with a 580 score. Carries mortgage insurance premiums, in most cases for the life of the loan.
- VA: zero down for eligible service members and veterans, no mortgage insurance, with a funding fee instead.
- USDA: zero down in designated rural areas, subject to income limits.
The trade-off is straightforward. A smaller deposit gets you in sooner and costs more every month. On a $450,000 purchase, moving from 10% down to 20% removes PMI worth roughly $150 a month and lowers the loan by $45,000.
Getting rid of PMI
On a conventional loan, mortgage insurance is not permanent, but the rules matter:
- At 80% loan-to-value of the original value, you may request cancellation in writing.
- At 78%, the servicer must cancel it automatically.
- A new appraisal showing appreciation can get you there faster, though servicers set their own seasoning requirements.
FHA is different. On most loans originated after June 2013 with less than 10% down, the mortgage insurance premium lasts the life of the loan, and the only exit is refinancing to a conventional mortgage. That refinance is often worth doing on its own, independent of any rate change.
Closing costs, itemised
Budget 2–5% of the purchase price, on top of the deposit. On $450,000 that is $9,000 to $22,500. Typically:
- Origination / underwriting — 0.5–1% of the loan
- Appraisal — $400–$800
- Credit report — $30–$100
- Title search and lender's title insurance — $700–$2,000
- Owner's title insurance — optional, and usually worth buying
- Survey — $400–$1,000 where required
- Recording fees and transfer taxes — varies enormously by state
- Prepaid interest — from closing to the end of that month
- Escrow funding — often 2–6 months of tax and insurance up front
- Home inspection — $300–$600, paid before closing and non-refundable
Every US lender must give you a Loan Estimate within three business days of application, on a standard form, and a Closing Disclosure three business days before closing. Compare the two line by line. Some figures are legally permitted to change; others are not.
The escrow surprise
Most lenders collect tax and insurance monthly and pay them on your behalf. Two things routinely catch first-time buyers out.
Reassessment. Your first year's escrow is often based on the previous owner's tax bill. Many jurisdictions reassess on sale, and the new bill can be substantially higher. The shortfall arrives as a lump demand or a sharp monthly increase, usually twelve to eighteen months in.
Insurance rises. Premiums have moved sharply in many regions, and they flow straight into your escrow payment.
Build a buffer for a payment 10–15% above the quoted figure. It is not a matter of if.
Getting the rate right
- Shop three or more lenders within a two-week window so the credit enquiries score as one.
- Include a credit union and a broker, not just retail banks.
- Compare on the same term and same points, or you are not comparing at all.
- Ask about the rate lock. How long, what it costs to extend, and whether it floats down if rates fall.
- Do not change anything financially between approval and closing. Lenders re-pull credit. A new car loan can sink the mortgage days before completion.
A realistic sequence
- Six to twelve months out. Pull credit, fix errors, cut card balances, stop opening accounts.
- Three months out. Assemble two years of tax returns, two months of pay slips, two months of bank statements. Season any gifted deposit in your account and document its source.
- Pre-approval. Underwritten, not a soft pre-qualification. Sellers treat the two very differently.
- Offer accepted. Inspection first, appraisal second, then lock the rate.
- Closing. Read the Closing Disclosure against the Loan Estimate. Question every difference.