Getting ready
I’m ready to buy a home this year. What’s next?
What does it take to qualify for a mortgage?
When it comes to securing a mortgage, there are several financial considerations at play. Here are a few key factors that will affect your ability to qualify for a loan with favorable terms.
A good credit score
Mortgage lenders consider your credit score when determining how risky it is to give you a loan, which impacts the interest rate you can get. Shoot for a 740 or higher if you can. All else equal, if your credit score is above 760, you are likely to get a mortgage interest rate that is about 0.25% to 0.375% lower than someone with a credit score of 660. If your credit score is in the 500s, you should expect some challenges in qualifying for a mortgage and, if you do find one, it may have a much higher interest rate.
A low debt-to-income (DTI) ratio
Your DTI is the sum of all of your monthly debt payments, including credit lines, minimum monthly payments for any credit card debt, auto loans, and your upcoming mortgage expenses, as a percentage of your monthly pre-tax income. Most mortgage lenders prefer to issue a mortgage that will keep your DTI below 43%. Once your DTI goes above that, it becomes much more difficult to secure a mortgage. This calculator can help you determine your DTI ratio.
Does RSU income “count” when calculating your DTI?
Danielle Daniels (NMLS #2781987) a Director of Home Lending Operations at Wealthfront, explains what you need to know if you receive income from restricted stock units, or RSUs.
If restricted stock units, or RSUs, are part of your compensation then it’s important to understand under what circumstances they “count” for the purposes of calculating your DTI ratio. The answer will vary from lender to lender, but here’s an overview of what they tend to look for.
When your RSUs are likely to count:
They’re already vested, and they’ve been vesting for at least a year.
Your vesting schedule indicates they’ll continue to vest for several more years.
The company is public (so lenders can assume your RSUs are at least somewhat liquid).
When your RSUs are unlikely to count:
They’re not vested yet, and you’re brand new to the company.
You received a one-time grant that doesn’t continue into the future.
The company is still private, meaning the RSUs aren’t liquid.
Wealthfront Home Lending treats RSUs as qualifying income when your company is public, the shares in question are fully vested, and vesting is expected to continue for at least three more years.
A healthy down payment
The size of your down payment, or the up-front payment you make on the house, impacts your interest rate, whether you need to pay private mortgage insurance, and the size of your monthly mortgage payments. Conventional wisdom is to put at least 20% down to avoid the need for mortgage insurance, but there are various loan options that allow for a down payment as low as 3%. In 2025, the median down payment for first-time homebuyers was about 10%. In general, the bigger your down payment, the lower your interest rate (which saves you money over the long run).
What are the all-in costs of home ownership?
Some people mistakenly believe that the only costs of home ownership are the down payment and the monthly principal and interest payment. However, if you budget with only these factors in mind, you’ll likely be caught off guard when the bills come rolling in.
Some additional costs to keep in mind:
Closing costs
A typical home buyer pays around 2% of the cost of the home to obtain the loan and complete the real estate transaction. This amount goes towards things like an appraisal of the home value, attorney fees, title search fees, transfer taxes, prepaid taxes, insurance, and some required fees your lender might charge. Generally, you can expect to pay these when you close on the home.
Property taxes
Most local governments levy a tax on your real estate. The rate ranges significantly by state and county and is applied to the value of the home.
Homeowners insurance
On average, homeowners insurance (which is required if you have a mortgage) costs about $180/month. In regions that are more prone to natural disasters the average rate can be substantially higher, and you may be required to carry additional insurance (like flood insurance, for example). Your lender can help you determine whether an additional policy is necessary.
Private mortgage insurance (PMI)
If you make a down payment of less than 20%, you’ll likely need private mortgage insurance. This calculator can help you understand the costs. As a rule of thumb, Freddie Mac says that for every $100,000 you borrow, PMI is likely to cost between $30 and $70 a month.
Maintenance costs
Routine home maintenance and repairs will vary depending on where you buy a house and the age of that house, among other factors. Some experts recommend earmarking 1% or more of your home’s purchase price annually to address these costs as they arise.
HOA fees
Most homes aren’t part of a homeowner association (HOA), but about one-third of homes nationally are. HOA fees range by location and dwelling type, but are $259 per month on average.
As you can see in the simplified example below, if you only account for principal and interest in your monthly payments, you could end up underestimating your true monthly costs by a significant amount.
Simplified monthly cost breakdown
Assuming you put 20% down on a $900,000 home with a 30-year fixed rate mortgage
How much house can I afford?
It’s hard to shop with no budget. That’s why, pretty early on in the home buying process, it’s wise to think about what you can afford. This will help you target listings and make sure you’re still in a good position to meet your other financial goals.
The short answer
To figure out how much house you can afford, start by calculating a comfortable down payment and monthly payment, and use those numbers to back into a home value. Avoid the temptation to spend every penny, and make sure to factor in other large expenses like debt payments. A calculator like this one from Freddie Mac can help.
The longer answer
It’s all about tradeoffs. Here’s our guidance on navigating these calculations a step at a time.
Step 1: Start with your down payment.
- The basics: Your down payment is your initial, up-front investment in the home. The size of your down payment impacts your interest rate, whether or not you need private mortgage insurance (PMI), and how big your monthly payments are.
- Conventional wisdom: A 20% down payment is a reasonable starting point for many people, but it’s not right for everyone.
- When to adjust:
- Putting down more than 20% could make sense if you have significantly more cash on hand and want to reduce your monthly payments or potentially get a lower rate.
- Putting down less than 20% could make sense if you are comfortable with larger monthly payments and want to minimize your up-front costs. For example, maybe you want to hold back money to invest instead.
Step 2: Calculate monthly payments (including all-in costs above)
- The basics: These payments will include mortgage principal and interest along with property taxes and homeowner’s insurance (depending on how you choose to handle them, although you’ll need to budget for them either way) and HOA fees if applicable. This calculator from Fannie Mae can help you estimate your monthly payments—just be sure to click on “Advanced View” and factor in those costs as well.
- Conventional wisdom: Historically, the guidance has been to spend no more than 30% of your pre-tax income on housing. This suggestion originated in 1969, when rent in public housing projects was capped at 25% of income. The US Department of Housing and Urban Development raised the cap to 30% in 1981.
- When to adjust:
- Spending more than 30% of your pre-tax income on housing each month might be OK if your income is very high. That’s because some of your other non-housing costs might be fixed and represent a smaller chunk of your income. It might also make sense if you live in an area with a high cost of living, or if you expect your income to continue to increase over time. If you have no other debts, a lender will generally preapprove you for monthly payments that comprise up to 43% of your pre-tax income, but it’s up to you to decide if you feel comfortable handling the monthly payment.
- Spending less than 30% of your pre-tax income on housing each month could make sense if you like having a big financial buffer or are saving for other large financial goals like early retirement or a child’s tuition.
Step 3: Leave yourself a comfortable buffer
- The basics: When you’re buying a house, it’s smart to leave yourself a good amount of buffer. That means not spending every penny on your down payment and not committing to a monthly payment that you know will put a lot of pressure on you.
- Conventional wisdom: You should still leave yourself at least enough wiggle room to cover the following items:
- An emergency fund (with at least 3-6 months’ worth of expenses)
- Your regularly occurring and short-term expenses (groceries, bills, next month’s vacation, any debt you’re paying off, etc)
- Saving/investing for other long-term goals, like a wedding or child’s education
- Saving/investing for retirement
- Home repairs and maintenance. Things will break! Consider setting aside 1% or more of your home’s purchase price annually to fix them.
- Closing costs (often around 2% of total home value)
- When to adjust: This step is less about making adjustments to a general rule and more about figuring out what’s right for your individual situation. For example, if you have a goal to invest $500 each month, you should make sure your monthly budget (including whatever you pay for housing) leaves you enough room to do so.
Step 4: Run the numbers with your interest rate
As you probably know, prevailing interest rates for mortgages can have a big impact on your monthly payment and overall housing budget.
You’ll need to factor in interest rates as you put together the figures you came up with in steps 1 through 3. A calculator like this one from Fannie Mae can help (and you can use additional online calculators to estimate your property taxes and homeowners insurance). Adjust the various inputs (along with your likely interest rate, which any lender should be happy to provide) until you land on a home purchase price that accurately reflects your needs.
How interest rates impact your monthly payment
Let’s assume you decide to put 20% down on a $900,000 house and take out a 30-year fixed-rate mortgage. Ignoring the impact of taxes, insurance, and HOA fees, here’s a simplified illustration of the difference various interest rates (which do not represent actual rates) would make on your monthly payments:
Some scenarios to consider in your calculations:
- What if you expect a large raise or windfall? In most cases, you won’t get approved for a larger loan based on the expectation of a future raise. However, in this scenario, you might be able to pay down your loan balance more quickly or accelerate your progress on other financial goals if the raise/windfall materializes.
- What if you expect your household income to decrease? Do you or your co-borrower plan to take some time off of work? Are you planning a career change that comes with a pay cut? These are good reasons to consider spending less on your home today than you can technically afford now.
- What if you plan to have kids? As you very likely know, kids can be expensive. You might consider scaling back your housing budget so you have more room to pay for things like childcare, which can easily cost $1,300 or more per child per month depending on where you live.
A final word: Once you’ve figured out your budget, stick to your number. Your housing budget is primarily a function of what you are comfortable with. Don’t be swayed by friends, family members, or even your pre-approval letter. If you’re not comfortable with the payments, then it’s not a good idea.
Get a transparent rate estimate for properties in CO, TX, and CA in seconds using Wealthfront’s rate calculator.
How big should my down payment be?
Before diving into the details, let’s first define a few key terms:
Down payment refers to the upfront payment you make on the house.
Principal payments reduce the amount you owe on your mortgage.
Interest payments are what the bank charges for lending you the money.
As we mentioned in the previous section, conventional wisdom is to put at least 20% down to avoid the need for mortgage insurance, but there are various loan options that allow for a down payment as low as 3%. Private mortgage insurance costs vary, but this calculator from Freddie Mac can help you estimate what yours would be. The median down payment for first-time homebuyers is about 10%.
The size of your down payment directly affects the overall costs of your home.
Larger down payment
Smaller loan, which means smaller monthly principal and interest costs (all else equal)
Less likely to need mortgage insurance
Smaller down payment
Larger loan, which means larger monthly principal and interest costs (all else equal)
More likely to need mortgage insurance (which is an added monthly cost)
Here’s an example
A larger down payment means lower monthly payments
The example assumes a single-family home that costs $900,000 with a 30-year fixed rate mortgage. It also assumes the buyer has a 760 credit score with a 25% DTI ratio. It ignores the impact of taxes and insurance.
Down payment | 10% | 20% | 30% |
|---|---|---|---|
Monthly principal & interest payment | $4,877.73 | $4,327.42 | $3,746.04 |
Monthly mortgage insurance | $405 | $0 | $0 |
Total monthly costs | $5,282.73 | $4,327.42 | $3,746.04 |
Note: Assumes 6.041%, 6.023%, and 5.923% interest rates respectively for 10%, 20%, and 30% down payment scenarios.
Deciding between a larger down payment and investing
If you have more than 20% of your home value available for a down payment, you might wonder if it makes sense to make the larger down payment or invest the extra instead. The answer to this question is highly personal. The table below shows some high-level tradeoffs, assuming you have no other high-interest debt, you have a good emergency fund, and you’re still on track to cover other financial goals and home-related costs.
Larger down payment | Smaller down payment, investing the extra instead | |
|---|---|---|
Return | You get a “guaranteed” return in the sense that you will pay less interest over the life of the loan. If your mortgage rate is 6%, putting down more is like getting a guaranteed 6% return on that money. And often, putting down more than 20% can get you a lower rate on the amount you are borrowing, making this even more attractive. This “guaranteed return” is higher when mortgage rates are high. | You get a higher potential upside. You can see Wealthfront’s historical performance here, but it’s worth noting that for many time periods, net-of-fee returns have been significantly higher than prevailing mortgage rates. This might be relatively more attractive when mortgage rates are very low. |
Risk | Low; your “return” is guaranteed | Higher; investment returns vary and can be negative |
Taxes | Your 6% “guaranteed” return is after taxes. In many cases, you can deduct mortgage interest from your taxable income, but you have to itemize to get this benefit. It’s best to speak with a tax advisor if you have questions about how this applies to your situation. | Your investment return is pre-tax. Investments held for at least a year are generally taxed at a lower, long-term capital gains rate (up to 20% at the federal level) than investments you hold for less time. |
Other considerations | You have less liquidity (your money is tied up in your home). Your offer will likely be more competitive—buyers putting down over 20% might be viewed more favorably. | You have more liquidity, assuming you invest in a fairly liquid account. In a highly competitive market, this approach might work against you. |
The bottom line
The right size down payment is the one that allows you to feel comfortable with your monthly payments and reach your other goals. For some people, this will mean maximizing what they pay up front so they won’t have the stress of large monthly payments in the ensuing years. For others, this will mean putting down less—potentially to leave room in the budget to address other short-term goals or even maximize the amount of money available to invest.
When is the right time to buy?
Timing the real estate market is like trying to time the stock market—it’s very hard to do. Plus, supply and demand vary regionally, making any attempt to time the market even more challenging.
The chart below shows the Case-Shiller Home Price Index, a leading measure of US residential real estate prices, over time. As you can see, while home prices in the US have generally increased over time, short-term real estate market volatility is hard to avoid.
It’s Hard to Time the Housing MarketVolatility in the Case-Shiller Home Prices Index since 1987
Similar to changes in home prices, changes in prevailing interest rates are also difficult to predict. Mortgage rates are correlated with 10-year Treasury rates, and even experts disagree on some of the factors that drive long-term Treasury yields.
What does that mean for you? We don’t think you should put much effort into trying to time your home purchase. If you find a home you like that you can afford and you’re likely to stay in for at least five years, then it’s reasonable to go for it.
What if there’s a downturn in the housing market?
Housing market downturns happen, period. If you buy a home, you should be emotionally prepared for its value to fluctuate over time, just like the value of any investment.
In the event of a downturn, if you have a fixed-rate mortgage, your monthly principal and interest payments shouldn’t be affected. However, you may be at risk if there’s a significant drop in real estate prices and you have a sudden need to sell your home, say for a job opportunity in a new location. In this case, you may be forced to sell your home at a loss. If the value of your home has decreased significantly, you may not have enough to repay the remaining balance on the mortgage. In general, the larger your down payment, the lower the risk that you face this particular issue.
Does time of year matter?
Buying a house in the spring/summer, which is typically seen as “home-buying season,” can mean there are more homes on the market for you to choose from. However, there can also be more competition from other buyers—and this can translate into higher prices.
Buying a home in the fall/winter can mean there’s less inventory on the market, so you might have fewer choices. But with fewer buyers looking, sellers might be more willing to negotiate—and that might mean you get a better price.
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