First Home Buyer Basics: Down Payment, Credit, DTI, and FHA vs Conventional

Published 2026-11-07 · eLoanTree Blog

Buying your first home is not one decision. It is a series of smaller decisions: how much to put down, what kind of loan fits, what monthly payment you can carry, and what the insurance will cost. This guide explains those pieces in plain language, so you can ask a lender better questions. It does not promise that you will qualify for any loan, rate, or amount.

1. The 20% myth

Many first-time buyers believe you must put 20% down. You do not have to, although 20% has a real benefit: with most conventional loans, 20% down usually means no private mortgage insurance (PMI). With less than 20% down, PMI is often required, and it adds to the monthly payment.

Here is what different down payments look like on an illustrative $400,000 home:

• 3% down: $12,000, loan $388,000
• 3.5% down (the FHA minimum with a qualifying credit score): $14,000, loan $386,000
• 5% down: $20,000, loan $380,000
• 10% down: $40,000, loan $360,000
• 20% down: $80,000, loan $320,000

A smaller down payment leaves more cash in savings, which matters for moving, repairs, and emergencies. A larger down payment means a smaller loan, a lower monthly payment, and usually less interest over time. There is a trade-off, not a single correct answer.

Some buyers also use down payment assistance programs offered by states, cities, or nonprofits. Those programs vary by location and have their own rules and limits. Ask a licensed lender or housing counsellor what exists in your county, and read the terms. Assistance is not the same in every state.

2. Credit score, in general terms

Your credit score is a number based on your credit history: whether you paid on time, how much you owe, how long you have had credit, and other factors. Lenders use it, with income and debts, to judge risk. In general, a higher score usually means more loan choices and, if you qualify, a lower rate. A lower score does not automatically mean no loan, but it usually means fewer choices and higher costs.

For FHA loans, the U.S. Department of Housing and Urban Development (HUD) sets a minimum decision credit score of 580 for a 3.5% down payment, and 500 to 579 for a 10% down payment, under HUD Handbook 4000.1. Scores below 500 are generally not eligible for FHA-insured financing under those HUD rules. Individual lenders may apply stricter standards than the agency minimum, so a lender can require a higher score than HUD does.

For conventional loans, there is no single score that guarantees approval. Many lenders look for a score of 620 or higher, and some require more. Again, the score is only one part of the decision. Income, debts, savings, employment history, and the property all matter.

Do not pay a company that promises to fix your credit overnight. Check your credit reports for errors, pay on time, and keep credit card balances low relative to their limits. Those habits help over time, but they do not guarantee a particular score by a particular date.

3. DTI, explained with an example

DTI means debt-to-income ratio. It compares your monthly debt payments with your gross monthly income — your income before taxes.

The formula is simple:

DTI = total monthly debt payments divided by gross monthly income

Lenders usually look at two versions. The front-end ratio looks at housing costs alone. The back-end ratio looks at housing plus all other monthly debts, such as car loans, student loans, and minimum credit card payments. The back-end ratio is the one most buyers hear about.

Here is an illustrative example. Suppose your gross monthly income is $8,000.

• Housing payment (principal, interest, taxes, insurance): $2,200
• Car loan: $400
• Student loan: $250
• Credit card minimums: $150

Total monthly debts: $3,000. DTI: $3,000 divided by $8,000 = 37.5%.

A lower DTI usually means more room in the budget. A higher DTI usually means the lender sees more risk. There is no universal DTI that guarantees approval, and limits vary by loan type and by lender. FHA loans can allow a higher DTI than some conventional loans in some cases, but the lender still reviews the full picture. Use DTI as a budgeting tool first: if the ratio is high, the payment may feel tight even if a lender approves it.

4. PMI vs. MIP: the insurance you pay when you put less down

When you put less than 20% down on a conventional loan, you usually pay private mortgage insurance, or PMI. PMI protects the lender, not you, if you default. It is usually paid monthly as part of your mortgage payment.

Under the Homeowners Protection Act, you can usually ask to cancel PMI when your loan balance reaches 80% of the original value of the home, and it must end automatically at 78% if you are current on payments, subject to the laws conditions. Ask your lender for the exact rules for your loan.

FHA loans have their own insurance, called mortgage insurance premium, or MIP. It has two parts, and the figures below are verified from HUD sources.

The upfront mortgage insurance premium is 1.75% of the base loan amount (Source: HUD, FHA MIP schedule; HUD Mortgagee Letter 2023-05, effective March 20, 2023). It is usually financed into the loan, so you do not pay it separately at closing, but it increases the loan balance.

The annual MIP is 0.55% per year for most 30-year FHA loans with less than 5% down (Source: HUD, FHA MIP schedule; HUD Mortgagee Letter 2023-05). It is divided into monthly payments. With 5% or more down, the annual rate is usually 0.50% for most 30-year loans. These rates are as set in HUD Mortgagee Letter 2023-05 and were still in effect in October 2026, according to HUD sources reviewed in November 2026. Confirm the current rate with a lender before you rely on it.

How long MIP lasts matters. If you put less than 10% down, annual MIP usually lasts for the life of the loan. If you put 10% or more down, it usually ends after 11 years. That is a major difference from conventional PMI, which can end when you build enough equity. Many buyers refinance out of an FHA loan later to remove MIP, but refinancing is not guaranteed and has its own costs.

A worked example, labelled illustrative: on a $400,000 home with 3.5% down, the down payment is $14,000 and the base loan is $386,000. The upfront MIP at 1.75% is about $6,755, usually added to the loan, making the total loan about $392,755. Annual MIP at 0.55% is about $2,160 per year in the first year, or about $180 per month, on top of principal, interest, taxes, and homeowners insurance. Your numbers will differ by price, down payment, and loan terms.

5. FHA vs. conventional, side by side

FHA loans are insured by the Federal Housing Administration, part of HUD. They are designed to be more accessible: lower down payments and more flexible credit rules. The trade-off is MIP, which is charged on every FHA loan and, with less than 10% down, lasts for the life of the loan.

Conventional loans are not insured by FHA. They are usually sold to Fannie Mae or Freddie Mac if they meet conforming limits. They often require a higher credit score and, with less than 20% down, PMI. The trade-off can be lower long-term insurance costs, because PMI can end when you reach enough equity.

In general terms, FHA can be a better fit if your credit score is lower or your down payment is small. Conventional can be a better fit if your credit is stronger and you can put more down, or if you want PMI to end sooner. That is a general comparison, not a recommendation. A lender who reviews your full finances can explain which options you may qualify for.

6. FHA loan limits for 2026: the correct numbers

FHA loan limits are set by county, and they change every year. For calendar year 2026, HUD set the nationwide one-unit floor at $541,287 and the ceiling at $1,249,125 (Source: HUD Mortgagee Letter 2025-23, December 11, 2025; effective for FHA case numbers assigned on or after January 1, 2026). The floor is 65% of the national conforming loan limit of $832,750, and the ceiling is 150% of that limit (Source: HUD Mortgagee Letter 2025-23).

A figure of $551,288 that appears in a YouTube video is wrong. Do not use it. The correct floor is $541,287 — $10,001 lower.

These limits are loan limits, not house-price limits. That distinction trips up many buyers. The limit caps how much FHA will insure, not how much the house can cost. If you buy a $560,000 home in a floor county and put enough down so the loan is $541,287 or less, FHA can still work. If the loan itself is above the limit for your county, FHA cannot insure it, and you would need a different loan type.

Most counties use the floor. High-cost counties use a higher limit, up to the $1,249,125 ceiling. A few special areas — Alaska, Hawaii, Guam, and the U.S. Virgin Islands — have higher limits. To find your countys exact limit, use HUDs FHA Mortgage Limits lookup, or ask a lender to look it up with you. Do not rely on a national average or a videos number for your county.

7. A first-buyer checklist

• Check your credit reports, and fix errors well before you apply.
• Save for the down payment, closing costs, moving, and a reserve after closing.
• Work out your DTI and a monthly payment you can live with, not just the maximum you might be approved for.
• Ask whether you may qualify for FHA, conventional, or both, and what the total monthly cost would be for each, including mortgage insurance.
• Ask about down payment assistance in your state and county.
• Get pre-approved before you make an offer, and keep your finances steady during underwriting.
• Budget for the home itself: inspection, insurance, taxes, maintenance, and repairs.

8. Common mistakes

• Believing 20% down is required, and waiting years to save it while prices and rents change.
• Looking only at the down payment, and forgetting closing costs and the reserve.
• Assuming FHA is always cheaper. With less than 10% down, MIP lasts for the life of the loan, which can cost more over time than PMI on a conventional loan.
• Using the wrong loan limit for your county, or confusing a loan limit with a house-price limit.
• Taking on new debt — a car loan, a store card, a personal loan — while your mortgage is being underwritten.
• Choosing the highest payment a lender will approve, rather than a payment that leaves room for life.

You do not need to know everything before you start. You need to know the pieces — down payment, credit, DTI, and insurance — and how they fit together for your budget. Then get a written estimate from a licensed lender and compare the full monthly cost, not just the rate.