How Much House Can I Actually Afford?

This is the right question to ask first, and the honest answer is: it depends on more than just your income. Lenders use a few key ratios to determine how much they are willing to lend you, but what you qualify for and what makes sense for your life are two different conversations.

The standard guideline is that your total monthly housing costs—including principal, interest, taxes, insurance, and any HOA dues—should not exceed 28% of your gross monthly income. Your total debt obligations, which includes housing plus car payments, student loans, and credit cards, should generally stay under 43%. This is called your debt-to-income ratio, or DTI.

A practical starting point: take your annual household income, divide by 12, and multiply by 0.28. That gives you a rough ceiling on what your monthly payment should look like. From there, work backward with your lender using current interest rates to estimate a purchase price range.

What Is My Down Payment Requirement?

The 20% down payment is a myth that keeps a lot of buyers on the sidelines longer than necessary. While putting 20% down does eliminate private mortgage insurance and typically results in better loan terms, it is not the only path to homeownership.

Common down payment options:
• Conventional loans: as low as 3% down for qualified first-time buyers
• FHA loans: 3.5% down with a credit score of 580 or higher
• VA loans: 0% down for eligible veterans and active-duty military
• USDA loans: 0% down for properties in eligible rural and some suburban areas
• CalHFA programs: California-specific down payment assistance for income-qualified buyers

What Is the Difference Between Prequalification and Preapproval?

Prequalification is a quick, informal estimate based on information you self-report. There is no verification of income, assets, or credit. It carries very little weight in a competitive market.

Preapproval is a formal process. The lender pulls your credit report, verifies your income through pay stubs and tax returns, reviews your bank statements, and issues a conditional commitment letter. In the Sacramento market, most listing agents require a preapproval letter before they will show a home.

What Credit Score Do I Need to Buy a Home?

• 620+ is typically required for conventional loans
• 580+ qualifies for FHA loans with 3.5% down
• 500–579 may qualify for FHA with 10% down
• VA and USDA loans do not have a government-mandated minimum, but most lenders require 580–620

Your credit score also directly affects your interest rate. A score of 760 or above typically unlocks the best available rates.

How Much Are Closing Costs?

In California, buyers typically pay between 2% and 5% of the purchase price in closing costs, separate from the down payment. These costs include lender fees, title insurance, escrow fees, prepaid property taxes, homeowners insurance, and prepaid interest.

On a $500,000 purchase, that could be $10,000 to $25,000 due at closing in addition to your down payment.

What Is Private Mortgage Insurance (PMI)?

PMI is insurance that protects the lender in the event you stop making payments. It is typically required when your down payment is less than 20% on a conventional loan. PMI usually costs between 0.5% and 1.5% of the loan amount annually.

Once your loan balance reaches 80% of the home's original appraised value, you can request cancellation. At 78%, your lender is federally required to cancel it automatically.

Frequently Asked Questions

Q: Can I use gift money for my down payment?

Yes, most loan programs allow down payment funds to come from a gift, typically from a family member. Your lender will require a gift letter signed by the donor stating the funds do not need to be repaid. Some programs have specific documentation requirements, so confirm with your lender early in the process.

Q: Does getting preapproved hurt my credit score?

A hard credit inquiry from a mortgage lender will temporarily lower your score by a few points. However, if you shop multiple lenders within a short window, typically 14 to 45 days depending on the scoring model, the inquiries are often treated as a single event. The impact is minor compared to the benefit of securing the right loan.

Q: What is an escrow account and do I need one?

An escrow account is managed by your lender and used to collect a portion of your monthly payment to cover annual property taxes and homeowners insurance on your behalf. Most lenders require escrow accounts when your down payment is less than 20%. It simplifies budgeting by spreading large annual bills across 12 monthly payments.

Q: How long does mortgage approval take?

From preapproval to full loan approval at closing, the process typically takes 30 to 45 days. Delays are most often caused by documentation issues, appraisal scheduling, or underwriting questions. Staying responsive to your lender's requests and having your paperwork organized in advance is the most effective way to keep things on track.

Q: Can I buy a home if I am self-employed?

Yes, though the documentation requirements are more extensive. Self-employed borrowers typically need two years of tax returns, profit and loss statements, and sometimes bank statements in lieu of traditional pay stubs. Working with a lender experienced in self-employed borrower files is important.

Q: What happens to my rate lock if closing is delayed?

Rate locks are for a specific period, typically 30, 45, or 60 days. If closing is delayed beyond your lock period, you may need to extend it, which usually comes with a fee, or relock at the current market rate, which may be higher or lower. Building buffer time into your contract timeline helps avoid this situation.