What to Know Before Buying Your First Home: Down Payments, Credit Scores, and the Real Cost of Homeownership

Buying your first home is the largest financial commitment most people ever make. It’s also one of the most confusing. Down payment myths, loan type acronyms, and costs that show up at closing all create anxiety that keeps potential buyers on the sidelines longer than necessary.

The median first-time homebuyer is now 40 years old, the highest ever recorded by the National Association of Realtors. First-time buyers account for just 21% of all home purchases, the lowest share since tracking began in 1981.

Those numbers don’t mean buying a home is impossible. They mean the process needs to be clearer. Here’s what you actually need to know.

How much home can you afford?

Start with the 28/36 rule. Lenders generally want your housing costs (mortgage, taxes, insurance) below 28% of your gross monthly income, and your total debt payments below 36%.

In practice, the income you need depends heavily on where you’re buying:

Home price	Estimated income needed	Assumptions
$250,000	~$65,000	20% down, 7% rate, 30-year fixed
$300,000	~$72,000	Same assumptions
$398,400 (national median)	~$111,000–$117,000	Per Redfin/Bankrate estimates

A six-figure income is now required to afford the typical home in more than half of U.S. metros. In Colorado, where the median home costs $593,000, the bar is even higher. Texas is more accessible at a $333,800 median.

Don’t let these numbers discourage you. Your actual affordability depends on your specific down payment, rate, and local market. Run the math for your situation before assuming you can’t qualify.

Down payments: the 20% myth

The single biggest misconception in homebuying is that you need 20% down. You don’t. Here’s what each loan type actually requires:

Loan type	Minimum down payment	Who qualifies
Conventional	3%	Most buyers with 620+ credit score
FHA	3.5% (580+ credit) or 10% (500–579 credit)	Buyers with lower credit scores
VA	0%	Veterans, active military, eligible spouses
USDA	0%	Buyers in eligible rural/suburban areas

On a $300,000 home, 3% down is $9,000. That’s a far cry from the $60,000 that 20% would require.

The trade-off: if you put down less than 20% on a conventional loan, you’ll pay private mortgage insurance (PMI), typically $50 to $200 per month depending on your loan size and credit score. PMI drops off once you reach 20% equity.

The median first-time buyer now puts down 10% according to NAR, the highest level in over three decades. Most draw from personal savings (59%), financial assets like retirement accounts (26%), or family gifts (22%).

Credit score requirements

Your credit score determines which loan programs you qualify for and what rate you’ll pay. Here are the minimums:

Loan type	Minimum credit score	Notes
Conventional	620	740+ for the best rates
FHA	580 for 3.5% down; 500 for 10% down	Lenders often set higher floors
VA	No official minimum	Most lenders require mid-600s
USDA	No official minimum	Most lenders require 640

The rate impact of your credit score is real. On a $250,000 loan, borrowers with scores of 760+ pay roughly $169 less per month than those with scores between 620 and 639. Over 30 years, that’s nearly $61,000.

If your score isn’t where you’d like it, even a few months of focused improvement can make a meaningful difference. Paying down credit card balances below 30% utilization and correcting errors on your credit report are the fastest levers.

Understanding your debt-to-income ratio

Your DTI ratio is your total monthly debt payments divided by your gross monthly income. Lenders use this to gauge whether you can handle a mortgage payment on top of your existing obligations.

Loan type	Maximum DTI
Conventional (manual underwriting)	36% (up to 45% with compensating factors)
Conventional (automated underwriting)	Up to 50%
FHA	43% (up to 50% with strong credit)
VA	41% guideline (flexible)

If your car payment is $400, student loans are $300, and credit card minimums are $200, that’s $900/month in existing debt. On a $6,000/month gross income, your current DTI is 15%. Add a $1,500 mortgage payment and you’re at 40%. Most conventional lenders would approve that.

The true cost of buying a home

The purchase price is just the start. Here’s what first-time buyers often underestimate.

Closing costs

Expect to pay 2% to 5% of the loan amount in closing costs. The national average is $4,661 in lender and third-party fees. On a $350,000 loan, budget $7,000 to $17,500.

These cover appraisal, title insurance, origination fees, and more. For a full breakdown, see our guide to closing costs explained.

Ongoing costs beyond your mortgage payment

Cost	Typical monthly amount
Property taxes	$200–$600 (varies widely by location)
Homeowners insurance	$100–$300
PMI (if less than 20% down)	$50–$200
Maintenance and repairs	~1% of home value per year
HOA fees (if applicable)	$100–$500

A common rule: budget 1% of your home’s value per year for maintenance. On a $350,000 home, that’s $3,500/year or about $290/month. Roofs, HVAC systems, and plumbing don’t care that you just spent your savings on a down payment.

Getting pre-approved: your first real step

Pre-approval is different from pre-qualification. Pre-qualification is an informal estimate based on what you tell the lender. Pre-approval is a formal process where the lender verifies your income, assets, credit, and debts, then tells you exactly how much they’ll lend you.

Getting pre-approved before you start house hunting does three things:

1. Sets your budget. You’ll know exactly what price range to shop in.
2. Strengthens your offer. Sellers take pre-approved buyers more seriously. In competitive markets, offers without pre-approval often go straight to the reject pile.
3. Speeds up closing. Much of the underwriting work happens during pre-approval, so the path from accepted offer to closing is shorter.

You’ll need to provide pay stubs (last 30 days), W-2s (last 2 years), tax returns, bank statements (last 60 days), and government-issued ID. Traditional lenders take 1 to 10 days for pre-approval. AI-powered lenders like Chestnut can deliver a fully documented pre-approval letter in under 2 minutes using a soft credit pull that doesn’t affect your score.

Pre-approval letters typically last 30 to 90 days. If yours expires before you find a home, your lender can reissue it with updated verification.

Choosing the right loan type

Conventional loans

Best for buyers with good credit (680+) and at least 3% to 5% down. Conventional loans offer the most flexibility on property types and have lower total costs than FHA loans for borrowers with strong credit profiles. PMI is required below 20% down but cancels automatically at 78% LTV.

FHA loans

Best for buyers with lower credit scores (580–680) or limited down payment savings. FHA loans require 3.5% down and are more forgiving on DTI and credit history. The downside: mandatory mortgage insurance premium (MIP) for the life of the loan, which adds 0.55% to 0.75% annually on top of an upfront premium of 1.75%.

VA loans

Best for veterans, active-duty service members, and eligible spouses. Zero down payment, no PMI, and typically the lowest rates available. There’s a funding fee (1.25% to 3.3% of the loan) that can be rolled into the loan. If you’re eligible, a VA loan is almost always the best option.

USDA loans

Best for buyers in eligible rural and suburban areas. Zero down payment with competitive rates. Income limits apply. A guarantee fee of 1% of the loan amount is charged upfront, plus an annual fee of 0.35%.

First-time buyer assistance programs

Free money exists. Most first-time buyers don’t know about it.

Texas programs

• My First Texas Home (TDHCA): 30-year fixed-rate mortgage with up to 5% in interest-free down payment assistance
• Home Sweet Texas (TSAHC): Up to 5% DPA as a grant or forgivable second mortgage
• Homes for Texas Heroes: Reduced rates and DPA for public service workers and veterans

Colorado programs

• CHFA FirstStep / FirstStep Plus: FHA loan with down payment assistance
• CHFA FirstGeneration: For first-generation homebuyers whose parents never owned a home

Federal programs

• Mortgage Credit Certificate (MCC): Tax credit for a portion of your annual mortgage interest, up to $2,000/year. This continues every year you live in the home, not just the first year.

The 10 most common first-time buyer mistakes

1. Believing you need 20% down. You don’t. Conventional loans start at 3%. VA and USDA require zero.
2. Not getting pre-approved before house hunting. You waste time looking at homes outside your budget and lose out to pre-approved buyers.
3. Shopping only one lender. Even small rate differences save thousands. The CFPB recommends getting quotes from at least three lenders.
4. Making big financial changes before closing. New credit cards, car loans, or job changes between pre-approval and closing can kill your loan approval.
5. Underestimating the costs beyond the mortgage. Taxes, insurance, maintenance, and HOA fees can add $500 to $1,000+ per month.
6. Skipping the home inspection to win a bidding war. This can cost you tens of thousands in surprise repairs.
7. Ignoring assistance programs. Down payment grants and tax credits are available in both Texas and Colorado.
8. Letting emotions drive the decision. Overbidding in a competitive market can leave you underwater if prices soften.
9. Forgetting about closing costs. Budget an additional 2% to 5% of the loan amount beyond your down payment.
10. Waiting for the “perfect” rate. Rates fluctuate. If the math works today and you can afford the payment, waiting for a marginally better rate risks missing the home you want.

Your next step

The first concrete step isn’t finding a house. It’s finding out what you qualify for.

Get a personalized quote from Chestnut in under two minutes. You’ll see the rates and loan options available for your specific financial profile, with no commitment and no phone calls required.

Frequently asked questions

How much money do I need to buy my first home?

At minimum, you need enough for your down payment (as low as 0%–3.5% depending on loan type) plus closing costs (2%–5% of the loan amount). On a $300,000 home with 3% down, that’s roughly $9,000 down plus $6,000–$15,000 in closing costs. First-time buyer assistance programs in Texas and Colorado can reduce this further.

What credit score do I need to buy a house?

The minimum is 620 for conventional loans and 580 for FHA loans. VA and USDA loans have no official minimum, though most lenders require 640+. Higher scores get significantly better rates: a 760 score saves roughly $169/month compared to a 620 score on a $250,000 loan.

How long does it take to buy a house from start to finish?

The typical timeline is 3 to 6 months. Pre-approval takes 1 day to 2 weeks. Home search averages 10 weeks per NAR. Once you’re under contract, closing takes 2 to 6 weeks depending on your lender and loan type.

Is it cheaper to buy or rent right now?

It depends on your market, down payment, and how long you’ll stay. In many Texas cities, buying is competitive with renting when you factor in equity building and tax benefits. In higher-cost Colorado markets, the math may favor renting short-term. The break-even point where buying beats renting is typically 3 to 5 years.

Should I wait for mortgage rates to drop?

If you can afford the payment at today’s rates and you’re ready to buy, waiting is a gamble. Rates may drop, but home prices may also rise, offsetting any rate savings. You can always refinance later if rates improve. See our guide on how refinancing can save you money.

Sources

1. https://www.nar.realtor/newsroom/first-time-home-buyer-share-falls-to-historic-low-of-21-median-age-rises-to-40
2. https://www.bankrate.com/real-estate/home-affordability-in-current-housing-market-study/
3. https://www.redfin.com/state/Texas/housing-market
4. https://www.redfin.com/state/Colorado/housing-market
5. https://www.bankrate.com/mortgages/down-payment-for-first-time-homebuyers/
6. https://www.nerdwallet.com/mortgages/learn/conventional-loan-requirements-guidelines
7. https://www.nerdwallet.com/mortgages/learn/fha-loan-requirements
8. https://www.myfico.com/credit-education/blog/credit-score-mortgage-rates
9. https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios
10. https://www.bankrate.com/mortgages/what-are-closing-costs/
11. https://www.bankrate.com/real-estate/average-closing-costs-by-state/
12. https://www.bankrate.com/mortgages/pre-approval/
13. https://www.consumerfinance.gov/owning-a-home/explore/contact-multiple-lenders/
14. https://www.bankrate.com/mortgages/texas-first-time-homebuyer-assistance-programs/
15. https://www.bankrate.com/mortgages/colorado-first-time-homebuyer-assistance-programs/