1. Down payment
Your down payment is the upfront cash you bring to closing. It directly affects your loan amount, your rate (sometimes), and whether you owe PMI.
- Conventional: 3% minimum for first-time buyers (HomeReady/Home Possible), 5% standard, 20% to skip PMI.
- FHA: Low minimum for credit 580+; a larger down payment for 500-579.
- VA / USDA: 0% if you qualify.
- Investment property: 15-25% conventional, 20-25% DSCR.
- Jumbo: 10-20% typical, more for second homes.
The strategic question isn't always "how much can I scrape together" - it's "what's the right down payment given my full financial picture." 20% kills PMI but ties up cash that might earn more elsewhere. More on the math →
2. Rate vs. APR
The interest rate is the base cost of borrowing. The APR (Annual Percentage Rate) folds in lender fees and represents the true cost of the loan over its life.
- A loan at 6.5% with $5,000 in fees might have a 6.65% APR.
- A loan at 6.625% with $0 fees might have a 6.63% APR - actually cheaper.
- When comparing lenders, always compare APR (along with rate). Rate alone hides fee differences.
One catch: APR assumes you hold the loan to term. If you'll refinance or sell in 3 years, the upfront fees matter more than the APR suggests because they don't have time to amortize.
3. Private Mortgage Insurance (PMI)
PMI protects the lender - not you - if you default. It's required on conventional loans with a smaller down payment, costs typically 0.3-0.7% of loan amount annually, and disappears when you hit 20% equity.
- Cancellable: PMI auto-cancels at 78% LTV (based on original purchase price). You can request earlier removal at 80% LTV with clean payment history.
- Lender-paid PMI (LPMI): pay a slightly higher rate forever instead of monthly PMI. Sometimes makes math sense if you'll hold the loan long.
- FHA's MIP is different: FHA's mortgage insurance has both an upfront fee and an annual portion that doesn't cancel without refinancing. More →
4. Debt-to-Income (DTI)
DTI is total monthly debt payments divided by gross monthly income. It's the single biggest factor in how much house you qualify for.
- Front-end DTI: housing payment alone. Typically capped at 36-43%.
- Back-end DTI: housing + all other debts (car, student loans, credit cards, alimony). Most conventional loans cap at 45%, sometimes 50% with strong compensating factors.
- FHA can stretch higher (50-57%) with reserves.
- VA uses a residual-income test that can effectively allow even higher DTI.
Paying down debt before applying lowers your DTI, which leaves more room for the housing payment.
5. Credit score
Your credit score directly affects your rate. The pricing tiers most lenders use:
- Below 620: limited options. FHA still possible at 580+ but the pricing isn't friendly.
- 620-679: qualifies for most programs but with material rate hits.
- 680-719: middle tier. Reasonable pricing but not the best.
- 720-739: better tier.
- 740+: top tier - best rates and pricing across most loan programs.
Moving up a pricing tier can improve your rate, and small rate differences add up over the life of a loan. If your score is close to a threshold, it's worth looking at what you can fix before applying.
6. Loan term
The term is how long you have to pay back the loan. Standard options: 30, 20, 15, 10 years. Each tradeoff is different:
- 30-year fixed: lowest monthly payment, highest total interest. The default for most buyers.
- 15-year fixed: higher monthly payment (~30-40% more), much lower rate, dramatically less total interest. Builds equity fast.
- 20-year fixed: middle ground, less common but available.
- 10-year fixed: aggressive paydown, similar rate to 15-year, mostly used for refinances.
- 5/6 or 7/6 ARM: fixed for 5 or 7 years, then adjusts. Lower initial rate. Used by buyers who expect to sell or refi before adjustment.
For a refinance, dropping from 30-year to 15-year is often a meaningful interest saver - especially when rates fall.