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It's time to buy —
What do you need to know?

  • Find out what you can afford.
  • Explore the impact of location.
  • Understand timing in the real estate market.

If the need for a home is imminent, the first step you should to take is to figure out what you can afford.

And we don't mean just the down payment, we mean total affordability.

What does it take to qualify for a mortgage?

When it comes to securing a mortgage, there are several financial factors at play. Here are a few things you can do to ensure you qualify for a mortgage with favorable terms:

Keep your credit score up

Mortgage lenders consider your credit score when determining how risky it is to give you a loan, which impacts the interest rate you can get. If your credit score is above 750, you are likely to get a mortgage interest rate that is 0.20% lower than someone with a credit score of 660 to 680. If your credit score is below 600, you should expect some challenges in qualifying for a mortgage and, if you do find one, it may have a much higher interest rate.

Keep your Debt-To-Income (DTI) ratio low

Your DTI is the sum of all of your monthly debt payments, including credit lines, credit card debt, auto loans, and your upcoming mortgage expenses, as a percentage of your monthly pre-tax income. Most mortgage lenders prefer to issue a mortgage that will keep your DTI below 33%. Once your DTI goes above 44%, it becomes much more difficult to secure a mortgage.

Make a healthy down payment

The size of your down payment, or the upfront payment you make on the house, impacts the size of your monthly mortgage payments. The standard rule of thumb for a down payment is 20%, however, the median down payment in the US is 15%. Mortgage lenders will often offer lower interest rates when a down payment of greater than 20% is made.

While these three inputs are common for most banks, mortgage approval standards vary regionally. In fact, our analysis shows that the median DTI ratio across states ranges from 32% in Kansas to 40% in Hawaii.

Your home budget is limited by the size of your mortgage, but other factors are at play as well when it comes to affordability. See more details

How big should my down payment be?

Before diving into the details, let's first define a few key terms:
  • Down payment refers to the upfront payment you make on the house.
  • Principal payments reduce the amount you owe on your mortgage.
  • Interest payments are what the bank charges for lending you the money.

The size of your down payment directly affects the overall costs of your home. The standard size of a down payment is 20% of what you pay for a home. If you put more down, you will have smaller monthly principal and interest payments.

If your down payment is lower than the standard 20%, not only will you have higher monthly principal and interest payments, but many mortgage lenders may require additional mortgage insurance, which can be up to 1% of your total mortgage value. Not to mention, if you put less than 10% down, you may have trouble qualifying for a mortgage at all.


Larger down payment means lower monthly payments

The example assumes a home that costs $800,000 with a 30-year fixed rate mortgage.

Down payment 10% 20% 30%
Monthly principal and interest payment $3,457 $3,055 $2,655
Monthly mortgage insurance $600 $0 $0
Total monthly costs $4,057 $3,055 $2,655
Note: Assumes 4.05%, 4%, and 3.94% interest rate respectively for 10%, 20%, and 30% down payment scenarios.
Source: Wealthfront Research

What are the all-in costs of home ownership?

Conventional wisdom may lead you to believe that the only costs of home ownership are the down payment and the monthly mortgage payment. However, if you budget with only these two factors in mind, you'll likely be caught off guard when the bills come rolling in.

Some additional costs to keep in mind:

This is not meant to discourage you from exploring homeownership, but rather to provide a comprehensive view into the costs you can expect when you become a homeowner. See the benefits of home ownership

Once you're armed with a home budget, you can start to understand what's possible and what trade-offs you may have to make.

How does location factor in?

Deciding where to buy is often almost as big of a decision as which home to buy. For those living in urban areas like New York or San Francisco, a fairly common question that arises is whether or not to make the move to the suburbs.

A huge draw of the suburbs is you can often get a larger home for the same budget. But, on the other hand, there are many perks and conveniences of city life that can't be easily replaced when you move away.

Aside from size of home you can get for your money, there are a number of other factors to consider and trade-offs to think through when deciding on the location to buy that's right for you:

Property taxes

Property taxes can vary dramatically by city or county. For example, Manhattan's property tax rate is 0.51%. While in Fort Lee, NJ, just 10 miles across the bridge, property taxes are are about 1.94% of home prices. However, the price of homes in Fort Lee is much lower, so it's important to to assess your all-in costs.

Mortgage rates

The location you choose could even affect the mortgage and its interest rate. When issuing mortgages, lenders often factor in the difficulty or ease of selling a home given its location, in case of foreclosure.


If you are planning on starting a family or have kids now, school districts are another major factor in deciding where to live. Great public school districts often increase home prices in a specific area, which means you may have to pay a premium for access to better education.


If your job is in the city, moving to the suburbs will mean increased time and money spent traveling every day.

Living costs

The cost for groceries, utilities, and other services can also vary widely between urban and suburban areas.

Given the magnitude of the purchase, you may understandably want to wait for the ideal time to buy.

When is the best time to buy?

Timing the real estate market is just like trying to time the stock market – it's impossible. Home prices will go up and home prices will go down. Plus supply-and-demand varies regionally, making any attempt to time the market even more challenging.

As evident from the Case-Shiller Home Price Indices, the leading measures of U.S residential real estate prices, while home prices in the US have increased over time, real estate market volatility is hard to avoid.


The real estate market is impossible to time

Group 2 Created with Sketch. 1990 100 500 Case-Shiller Index 2000 2010 2015 New York, NY San Francisco, CA Chicago, IL National Average Group 2 Created with Sketch. 1990 100 500 Case-Shiller Index 2000 2010 2015 New York San Francisco Chicago National Avg
Note: Data normalized to 100 in 1987
Source: S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index retrieved from Federal Reserve Bank of St. Louis

Keep in mind there's actually an implicit cost to waiting. Even if you don't pull the trigger on buying a home, that doesn't mean you're not incurring housing expenses. For instance, waiting a year to buy a home means paying a year of rent to your landlord instead of towards a mortgage. Find out how to compare renting versus owning.

We believe that if you're confident in your reasons to buy a home, you shouldn't delay taking action. Curious what are the reasons to buy a home? Learn about the benefits of home ownership.

What's next?

Once you understand the all-in costs of homeownership and determine your home budget, you can start making decisions on the details — what neighborhood, what size home, what time frame

See what's truly

Wealthfront uses your financial data to determine what you can afford and helps you plan for a home that fits with your other financial goals.

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