Most people borrow money through a mortgage and put down a percentage of the price upfront
A mortgage is a loan secured by the house itself. You borrow from a bank, credit union, or mortgage lender, and they hold a claim on the property until you pay them back. The lender typically requires you to pay between 3 and 20 percent of the purchase price upfront — this is your down payment. The larger your down payment, the less you borrow and the lower your monthly payment, but the more cash you need before you buy.
The remaining amount becomes your loan. You repay it over 15, 20, or 30 years (the most common term), paying principal plus interest each month. The interest rate depends on market conditions, your credit score, and the size of your down payment. A lower credit score or smaller down payment usually means a higher rate, which increases what you pay over the life of the loan.
Most mortgages also require you to pay property taxes and homeowners insurance as part of your monthly payment. If your down payment is less than 20 percent, you will also pay mortgage insurance — a monthly fee that protects the lender if you stop paying. These costs vary by location and the value of the house.
Key Takeaways
- A mortgage lets you borrow most of the house price and repay it over 15 to 30 years, but you must pay a down payment (usually 3 to 20 percent) upfront.
- Your monthly payment includes principal, interest, property taxes, homeowners insurance, and often mortgage insurance, so the total cost is much higher than the loan amount alone.
- Down payment money comes from savings, gifts from family, home buyer programs, or a combination of these sources.
- People with lower incomes or credit scores can still buy through FHA loans, VA loans, or state and local first-time buyer programs that require smaller down payments or offer other assistance.
- Some people buy without a mortgage by paying cash, inheriting property, or buying through owner financing, but these routes are less common.
Where down payment money comes from
Most first-time buyers save for years to accumulate a down payment. The amount needed depends on the house price and the type of loan. A conventional mortgage typically requires 5 to 20 percent down. An FHA loan (backed by the Federal Housing Administration) requires as little as 3.5 percent. A VA loan (for military members and veterans) may require zero percent down.
Family gifts are another major source. A parent, grandparent, or other relative may give money toward the down payment with no expectation of repayment. Lenders allow this, but they usually require a signed letter stating the money is a gift, not a loan. Some first-time buyer programs offer down payment assistance — grants or low-interest loans from state or local housing agencies that reduce the amount you need to save yourself.
A few people use retirement savings. The IRS allows first-time buyers to withdraw up to $35,000 from a Roth IRA without the usual early withdrawal penalty. Traditional IRA withdrawals are taxed as income, so this is less common. Some employers offer 401(k) loans, which let you borrow from your own retirement account and repay it over time.
How lenders decide whether to lend to you
Lenders look at three main things: your credit score, your income, and your debt-to-income ratio. Your credit score reflects your history of paying bills on time. Most conventional mortgages require a score of at least 620, though 740 or higher gets you better interest rates. FHA loans accept scores as low as 500 to 580.
Your income must be high enough that the monthly mortgage payment (plus taxes, insurance, and mortgage insurance) does not exceed a certain percentage of your gross monthly income — usually 43 to 50 percent, depending on the lender and loan type. If you earn $4,000 per month, a lender might approve you for a payment of up to $1,720. This is where your debt-to-income ratio comes in: if you already have car loans, credit card payments, or student loans, those reduce the amount the lender will lend you.
Lenders also verify your income through tax returns, pay stubs, and bank statements. Self-employed people and those with irregular income face more scrutiny and may need two years of tax returns. Some lenders work with borrowers who have recent credit problems, job changes, or lower scores, but they charge higher interest rates to offset the risk.
Programs for people with lower income or credit challenges
FHA loans are designed for borrowers who cannot meet conventional mortgage requirements. They require a lower down payment (3.5 percent), accept lower credit scores (580 and up), and allow higher debt-to-income ratios. The trade-off is that you pay mortgage insurance for the life of the loan, which increases your monthly cost.
VA loans are available to military members, veterans, and some surviving spouses. They typically require zero down payment, have no mortgage insurance requirement, and often have lower interest rates than conventional mortgages. You must have a Certificate of may be able to access from the Department of Veterans Affairs.
State and local first-time buyer programs vary widely. Some offer down payment assistance (grants you do not repay), others offer second mortgages at low or zero interest, and some offer tax credits that reduce your income tax bill. Your state housing finance agency or local housing authority can tell you what programs exist in your area. Community development financial institutions (CDFIs) also lend to borrowers with lower credit scores or income.
What happens after you get the mortgage
Once approved, you move to the closing stage. You sign loan documents, pay closing costs (typically 2 to 5 percent of the loan amount, covering appraisal, title search, attorney fees, and lender fees), and receive the keys. Your monthly payment begins 30 days after closing.
Over time, you build equity — the difference between what the house is worth and what you still owe. Early payments go mostly toward interest; later payments go more toward principal. After 15 or 30 years, you own the house outright and stop making mortgage payments (though you still pay property taxes and insurance).
If you sell the house before the mortgage is paid off, you use the sale proceeds to pay off the remaining loan balance. If the house appreciates (increases in value), the difference between the sale price and what you owe goes to you.
Alternatives to traditional mortgages
Owner financing is a less common route where the seller acts as the lender. You make monthly payments to the seller instead of a bank, and the seller holds the deed until you pay off the loan. This can work for buyers with poor credit or limited down payment savings, but interest rates are often higher and terms vary widely. You need a lawyer to review the agreement.
Cash purchases are possible if you have saved enough money or inherited property. You avoid interest, mortgage insurance, and lender fees, but you tie up a large amount of money in one asset and lose the ability to invest that money elsewhere. Some people use a combination: they pay cash for part of the price and take out a smaller mortgage for the rest.
Buying with a co-borrower — a spouse, parent, or other family member — increases the total income the lender considers, which may allow you to borrow more or get better terms. Both borrowers are legally responsible for the loan, so this only works if you trust the other person and both have stable income.
The real cost of homeownership beyond the mortgage
Your monthly mortgage payment is only part of the cost. Property taxes vary by location but typically range from 0.3 to 2 percent of the home's value per year. Homeowners insurance costs vary by location, home age, and coverage level but often runs $800 to $2,000 per year. Maintenance and repairs — roof, plumbing, heating, appliances — average 1 percent of the home's value per year, though this varies.
If you put down less than 20 percent, you also pay private mortgage insurance (PMI), which can be $100 to $500 per month depending on the loan size and your credit score. Once you reach 20 percent equity, you can request to have PMI removed, though you must ask — lenders do not remove it automatically.
These costs mean that a house with a $1,500 mortgage payment might actually cost $2,200 to $2,500 per month when you include taxes, insurance, maintenance, and mortgage insurance. This is why lenders look at your total income: they want to make sure you can afford the full cost, not just the loan payment.
Frequently Asked Questions
Can I buy a house with no down payment?
Yes, through a VA loan if you are a veteran or active-duty military member, or through some state and local first-time buyer programs. Conventional mortgages and FHA loans require at least 3 to 3.5 percent down. Some lenders offer zero-down programs, but they typically charge higher interest rates or require mortgage insurance.
What credit score do I need to buy a house?
Conventional mortgages typically require 620 or higher, though 740 or higher gets better rates. FHA loans accept scores as low as 500 to 580. If your score is below 620, focus on paying down existing debt and making all payments on time for several months before applying.
How much house can I afford?
A common rule is that your total monthly housing costs (mortgage, taxes, insurance, mortgage insurance) should not exceed 28 percent of your gross monthly income. Use a mortgage calculator with your income, down payment, and local property tax and insurance rates to estimate what you can afford in your area.
What if I do not have family to give me a down payment?
Save through a dedicated savings account, explore down payment assistance programs through your state housing finance agency or local housing authority, consider an FHA loan that requires only 3.5 percent down, or look into first-time buyer grants in your area. Some employers and nonprofits also offer down payment help.
What is the difference between being pre-may have access to and pre-approved?
Pre-qualification is an informal estimate based on information you provide; it does not verify income or credit. Pre-approval involves a full credit check and income verification, and it gives you a firm loan amount and interest rate. Pre-approval carries more weight when you make an offer on a house.