🎯 In 30 seconds: Buying usually makes sense when you expect to stay several years and the full monthly cost (not just principal and interest) fits your income. Lenders may approve more than is comfortable. Compare several Loan Estimates, know when PMI goes away, and use a free HUD-approved housing counselor if this is your first home.
Rent or buy
Buying has large one-time costs: closing costs going in, and selling costs (agent commission, transfer taxes, repairs) going out. Those need years of rising equity to recover, which is why many people use five years as a minimum stay. Renting is not throwing money away; part of a mortgage payment (interest, taxes, insurance) is also gone each month.
- Buy when: you expect to stay 5+ years, you have the down payment and an emergency fund left over, and your job and location feel stable.
- Keep renting when: a move is likely, the purchase would drain your savings, or the full monthly cost below is a stretch.
How much house: front-end and back-end ratios
Lenders look at your debt-to-income ratio (DTI): monthly debt payments divided by gross monthly income. A long-standing rule of thumb has two parts:
| Front-end ratio | Housing cost (mortgage, property tax, insurance, PMI, HOA) under about 28% of gross income |
| Back-end ratio | Housing plus all other debt payments (car, student loans, cards) under about 36% |
Different loan types and lenders allow higher ratios. That is the most you can borrow, not what is comfortable. Childcare, commuting and saving for retirement do not appear in a DTI calculation.
The true monthly cost: a worked example
A $350,000 home with 10% down ($35,000), a $315,000 30-year fixed loan, and an assumed 6.5% rate. Rates change daily; check Today’s Rates and lender quotes for real numbers. Tax, insurance and PMI below are illustrative assumptions too.
| Principal and interest | $1,991 |
| Property tax (assumed 1.1% of price a year) | $321 |
| Homeowners insurance (assumed $1,800 a year) | $150 |
| PMI (assumed 0.5% of the loan a year) | $131 |
| Monthly payment to the lender | $2,593 |
| Maintenance set-aside (1% of price a year) | $292 |
| True monthly cost | about $2,885, plus any HOA and higher utilities |
At 28%, a $2,593 housing payment needs gross income of about $111,000 a year. The headline principal-and-interest number is only about 69% of what you would pay the lender.
Down payment, PMI and closing costs
- PMI: with less than 20% down on a conventional loan, you usually pay private mortgage insurance. It protects the lender, not you.
- Getting rid of PMI: you can ask in writing to cancel it once your balance is scheduled to reach 80% of the home’s original value (good payment history required). The servicer must end it automatically when the balance is scheduled to reach 78%, if you are current.
- Government-backed loans (FHA, VA for veterans, USDA for eligible rural areas) allow smaller down payments, with their own fees and mortgage insurance rules.
- Closing costs (lender fees, title, appraisal, prepaid taxes and insurance) are paid on top of the down payment. Your Loan Estimate lists them line by line.
Pre-approval and comparing lenders
- Check your credit reports a few months ahead (see credit and identity) so errors can be fixed.
- Get pre-approved: the lender checks income, assets and credit and states how much it would lend. Sellers take pre-approved buyers more seriously than pre-qualified ones.
- Request Loan Estimates from several lenders for the same loan type on the same day, and compare total origination charges, rate and APR. The CFPB says to compare the total, not single fees.
- Read the Closing Disclosure you get before closing against your Loan Estimate and ask about any change.
Free help for first-time buyers
HUD-approved housing counseling agencies offer homebuyer education free or at low cost, and they know the state and local down payment assistance programs near you. Some assistance programs require a class first. Find one through the CFPB housing counselor search. Your state housing finance agency is the other place to look.