What first-time homebuyers get wrong most often

Most first-time homebuyers believe at least one thing that costs them money or keeps them from buying at all. The myths cluster around three areas: how much money you need upfront, what your credit score has to be, and whether you can afford a home on your actual income. None of these beliefs match what lenders actually do or what programs actually offer.

This guide separates what is true from what is not. The difference matters because a false belief — that you need 20 percent down, or a 750 credit score, or a six-figure salary — can stop you from even starting the process. Lenders work with lower down payments, lower scores, and lower incomes than most people think. Knowing the real rules changes what is possible for you.

Key Takeaways

  • You do not need 20 percent down to buy a home; many programs accept 3 to 5 percent, and some accept less.
  • A credit score below 620 closes most doors, but 620 to 680 is workable with the right loan type, not a barrier.
  • Your debt-to-income ratio — what you owe monthly divided by what you earn — matters more to lenders than your total salary.
  • Closing costs are real and substantial, but they are not always paid by you at closing; some can be rolled into the loan or covered by the seller.
  • A larger down payment does not always mean a better loan; sometimes a smaller down payment with mortgage insurance is the smarter financial move.

The 20 percent down payment myth

You do not need 20 percent down. This is the single most common myth, and it stops people from buying who could buy right now. Twenty percent was never a requirement — it was a preference lenders had because it reduced their risk. Today, conventional loans backed by Fannie Mae or Freddie Mac accept 3 to 5 percent down. Federal Housing Administration (FHA) loans accept 3.5 percent down. Some programs accept less.

The trade-off is real: with less than 20 percent down on a conventional loan, you pay mortgage insurance, which is an extra monthly fee that protects the lender if you stop paying. On an FHA loan, mortgage insurance is built in. But mortgage insurance is not permanent — on conventional loans, it drops off once you have paid enough of the loan that you own 20 percent of the home's value. The monthly cost is usually $100 to $300 depending on the loan size and your down payment.

The math often works in your favor. If you wait five years to save 20 percent down, you miss five years of building equity, locking in a mortgage rate, and not paying rent. Buying now with 5 percent down and paying mortgage insurance for five years is often cheaper than waiting. A mortgage professional can run the numbers for your specific situation.

Credit score requirements are lower than you think

Most people believe they need a 750 credit score to get a mortgage. The actual minimum is much lower. Conventional loans go down to 620. FHA loans go down to 580. Some lenders will work with scores in the 600 to 640 range on conventional loans if your down payment is larger or your debt-to-income ratio is strong.

What matters more than the number itself is what your score reflects: late payments, collections, or very high credit card balances. A score of 640 with no late payments in the last two years is stronger than a score of 680 with a recent missed payment. Lenders look at the story behind the number, not just the number.

If your score is below 620, you have real options before you give up. Some credit unions offer mortgages to members with scores as low as 580. Rebuilding your score by 20 to 40 points — which takes three to six months of on-time payments and paying down balances — can open doors to better rates and lower down payment requirements. A mortgage professional can tell you whether waiting to rebuild makes sense for your timeline.

Your income does not have to be six figures

The belief that you need a high salary to buy a home comes from seeing homes cost $300,000 or more. But what lenders care about is not your total income — it is your debt-to-income ratio, which is the percentage of your monthly income that goes to debt payments. Most lenders cap this at 43 to 50 percent, depending on the loan type and your credit profile.

This means someone earning $50,000 a year ($4,167 per month) can carry up to $2,084 in total monthly debt payments — mortgage, car loan, credit cards, student loans, all combined. If you have no car payment and your student loans are in income-driven repayment at $200 a month, you have $1,884 left for a mortgage payment. On a 30-year loan at current rates, that supports a home price around $350,000 to $400,000 depending on your down payment and local property taxes.

The second piece lenders check is whether your income is stable and documented. W-2 employment is easiest. Self-employment, contract work, and commission income are possible but require two years of tax returns showing consistent or growing income. If you changed jobs in the last two years, lenders want to see that your new job is in the same field and pays the same or more.

Closing costs are not always your problem

Closing costs — the fees for the appraisal, title search, inspection, underwriting, and recording — typically run 2 to 5 percent of the home price. On a $300,000 home, that is $6,000 to $15,000. Most first-time buyers think they have to pay this in cash at closing. They do not, always.

Three common ways to handle closing costs: First, the seller can pay them as part of the negotiation. This is common in buyer's markets and is written into the purchase agreement. Second, the lender can roll them into the loan, which means you pay them over 30 years with interest — more expensive long-term but easier upfront. Third, some first-time buyer programs and down payment information programs cover closing costs as part of their benefit.

Ask your lender upfront: "What closing costs can be rolled into the loan, and what must I pay at closing?" The answer changes what you need in savings before you buy.

A bigger down payment is not always the right choice

Conventional wisdom says put down as much as you can. The real answer is more complicated. If you have $50,000 saved and the home costs $300,000, you could put down $60,000 (20 percent) or $15,000 (5 percent). Putting down 20 percent means no mortgage insurance and a lower monthly payment. Putting down 5 percent means you keep $45,000 in savings, pay mortgage insurance of roughly $150 to $200 a month, but have a financial cushion.

The right choice depends on your emergency fund, your job stability, and your other debts. If you have no savings left after closing and your car is 12 years old, a larger down payment that leaves you with no cushion is risky. If you have six months of expenses saved separately, a smaller down payment with mortgage insurance and more liquid savings is safer.

Mortgage insurance also drops off automatically once you reach 20 percent equity through payments, which usually takes five to seven years. At that point, your payment drops and you keep the rest of the benefit — the lower initial payment and the cash you kept in savings.

You do not need a perfect financial history

Many people believe one late payment, a collection account, or a bankruptcy disqualifies them forever. The actual rules are more forgiving. A single late payment from three years ago does not stop you from getting a mortgage today. A collection account that was paid off can be overlooked if it is old enough. A bankruptcy can be behind you in as little as two years if it was a Chapter 7, or three years if it was a Chapter 13.

What lenders want to see is a pattern of recovery. If you had a rough patch three years ago but have paid everything on time since, that story is workable. If you had a rough patch last month, you need to wait. The waiting period is usually two years from the last late payment or collection before you are a strong candidate for a conventional loan, though FHA loans can sometimes work sooner.

A mortgage professional can review your actual credit report and tell you whether you are ready now or whether waiting six months would significantly improve your options. That conversation is worth having before you start house hunting.

Frequently Asked Questions

Do I really have to pay mortgage insurance if I put down less than 20 percent?

On a conventional loan, yes — mortgage insurance is required if you put down less than 20 percent. On an FHA loan, mortgage insurance is required regardless of down payment. But on a conventional loan, it drops off once you reach 20 percent equity through payments, usually in five to seven years. The monthly cost is typically $100 to $300 depending on loan size and down payment.

What if I had a foreclosure or bankruptcy?

A foreclosure or bankruptcy does not permanently disqualify you. Most lenders require a waiting period: two to three years for a foreclosure, two years for a Chapter 7 bankruptcy, or three years for a Chapter 13 bankruptcy. After that waiting period, you can be approved if your income and credit have stabilized. Some FHA loans have shorter waiting periods.

Can I get a mortgage if I am self-employed?

Yes, but you need two years of tax returns showing consistent or growing income. Lenders average your income over those two years. If your income is seasonal or variable, they may use a lower average. You will also need a CPA letter or accountant statement confirming your income and business status.

What if the seller will not pay my closing costs?

You have two main options: ask the lender to roll closing costs into the loan (you pay them over 30 years with interest), or look for a down payment information program that covers closing costs. Some first-time buyer programs include closing cost help. A mortgage professional can tell you which programs you may be able to use.

Does my student loan debt hurt my chances of getting a mortgage?

Student loans count toward your debt-to-income ratio, but lenders treat them differently than credit cards or car loans. If your loans are in income-driven repayment, the lender uses your actual payment amount. If they are in standard repayment, the lender calculates what the payment would be if consolidated. Either way, they are factored in, but they do not automatically disqualify you — it depends on your total monthly debt and income.