What you need to know about financing your dream home: an FAQ for buyers

Purchasing your dream home can be a major life achievement. And understanding how to secure the most favorable financing will position you for long-term success.

Here are answers to frequently asked questions about the process.

What are conventional loans?

Conventional loans are mortgages that aren’t backed by the federal government. They can be harder to qualify for than government-backed loans because lenders usually require:

Higher credit scores — typically 620 or above, though the best rates often go to borrowers with scores of 740-plus.
Larger down payments — often 5% to 20% of the home’s price.
Lower debt-to-income or DTI ratios — usually 43% or less, meaning your monthly debt payments shouldn’t exceed 43% of your gross income.

If you meet these requirements, conventional loans often cost less over time than government-backed options because they don’t require ongoing mortgage insurance once you reach 20% equity.

Are there different kinds of conventional loans?

Conventional loans fall into two categories:

Conforming loans: These meet the standards set by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that buy loans from lenders and package them into securities sold on the secondary market.
Nonconforming loans: These don’t meet government-sponsored enterprises guidelines, often because they exceed loan limits or have unique borrower qualifications.

Is a Federal Housing Administration or FHA loan easier to get than a conventional loan?

The Federal Housing Administration, part of the U.S. Department of Housing and Urban Development, offers a variety of mortgage loan programs. An FHA loan has a lower down payment requirement and can be easier to qualify for than a conventional loan. The FHA doesn’t make the loans itself, but guarantees qualifying loans made by approved private lenders, which lessens the lender’s risk.

FHA loans are designed for buyers who meet certain criteria and typically have more flexible credit requirements. They allow for smaller down payments, sometimes as low as 3.5%, or 10% in other cases. These loans are subject to limits that vary by location. For instance, in 2025, the cap on single-family home loan ranges from $524,225 to $1,209,750 depending on housing prices in the area.

What about a Veterans Affairs or VA loan — how does it work?

The U.S. Department of Veterans Affairs guarantees VA loans, though it does not issue them directly. Instead, the VA backs mortgages made by approved lenders, allowing qualified veterans and service members to access favorable terms, often with no down payment required. VA loans generally align with conventional loan limits, and applicants must obtain a certificate of eligibility from the VA before applying.

For 2025, the conforming loan limit for a single-family home is $806,500 in most U.S. counties. In high-cost areas, the limit increases to $1,209,750. Multiunit properties have higher limits, and certain locations — such as Alaska, Hawaii, Guam and the U.S. Virgin Islands — also follow the high-cost ceiling. Loans exceeding these amounts are considered jumbo loans and typically involve stricter qualification requirements.

Beyond federal programs, many state and local governments offer initiatives to promote homeownership in specific regions. These programs may include down payment assistance or other financial benefits.

What's the process — where do I begin?

Before you start touring homes or submitting offers, securing mortgage preapproval is an essential first step. It gives you a clear understanding of your budget and strengthens your position in a fast-moving market where properties often sell quickly.

“Definitely without question get preapproved… it doesn’t cost you anything except maybe 45 minutes of your time,” said Scott Bridges, chief consumer direct production officer at Pennymac, in an interview with Homes.com. “In a preapproval, we look at your income, your assets, and qualify you for that new loan. It’s a really important step because you know what you can buy and what you can afford. It helps you in your shopping journey.”

To this point, during the preapproval process, lenders review your credit score, income, debt-to-income ratio and overall financial profile. Once approved, you’ll receive a letter confirming the lender’s willingness to finance your purchase under specific terms and up to a set amount.

Having this letter in hand signals to sellers that you’re a serious, qualified buyer. In competitive markets, offers backed by preapproval are far more likely to stand out than those without it.

How good does my credit have to be?

When you apply for a mortgage, lenders look at several things to figure out how much they’ll lend you and what your interest rate will be. The most important factor is your credit, so they’ll check your credit score and review your credit history.

“Take care of your credit — the better your score, the better pricing you’ll get, even in a higher-rate market,” Bridges said. “If your score is really high, you’ll have more options. Also, don’t make any large purchases before buying a home. That can derail your FICO score and your debt-to-income ratio.”

Some ways to boost your credit score:

Pay down outstanding debt: Lowering your credit card balances and paying off loans can improve your credit utilization ratio, which is a key factor in your score.
Review your credit report for errors: Check your report regularly to catch and correct any mistakes that could negatively affect your score.
Make all payments on time: Timely payments are essential, as late payments can significantly lower your score.
Minimize new credit applications: Opening several new accounts in a short period can reduce your score. Hold off on large purchases or new credit inquiries before applying for a mortgage.

They also factor in how much you’re putting down compared to the price of the home. This is called loan-to-value or LTV ratio. It’s calculated by dividing the loan amount by the home’s purchase price. The more you put down, the less risky you seem to the lender. If your down payment is small, which means you have a higher loan-to-value ratio, the lender could see this as more risk and may charge you a higher rate. To improve your chances, include all your sources of income when you apply, even part-time jobs or any side hustle. Sometimes, extra income can help you qualify for a loan or get an even better rate.

Every property listed on Homes.com features an affordability calculator. You can customize inputs like down payment, interest rate, and loan terms to explore the various financial scenarios. The calculator uses real estate data to give you a detailed estimate of costs specific to the property, including taxes, homeowners association fees and homeowners insurance.

How big does my down payment have to be?

The size of your down payment can impact your mortgage terms. The larger your down payment, the better the interest rate and the fewer restrictions. However, if you plan to put down less than 20% on a conventional mortgage, your lender will likely require private mortgage insurance or PMI. Private mortgage insurance protects the lender by shifting part of the risks to a mortgage insurer in case you default on the loan. The cost of PMI depends on factors like your loan amount and mortgage type.

Once your home equity reaches 22%, which means your loan balance is 78% of the home’s value, the lender or loan servicer should automatically cancel your private mortgage insurance. If it doesn’t happen, you can request its removal.

Pro Tip: “Don’t buy the most expensive house you can afford… you may want to buy a house for less than you qualify for so you have a cushion and save a little more money," Bridges said. "Once you own a home, if you haven’t owned before, they come with a lot more costs — taxes, insurance and repairs.”

How do I determine if a fixed-rate or adjustable-rate mortgage is best for me?

Another consideration is whether you want a fixed rate or adjustable-rate (also known as variable rate or floating rate) mortgage. With a fixed-rate mortgage, your interest stays the same for the entire term of the loan. The main advantage is predictability — your monthly principal and interest payments won’t change. If rates are low when you lock in, you can secure that favorable rate for years.

An adjustable-rate mortgage, on the other hand, starts with a low introductory rate, which can make early payments more affordable and may even help you qualify for a larger loan. However, adjustable-rate mortgages carry risks. After the initial period, your rate can rise, increasing your monthly payments. Most adjustable-rate mortgages have caps to limit how much and how quickly rates can increase.

Most adjustable-rate mortgages start with a fixed interest rate for the first five, seven or 10 years. After that period ends, the rate doesn’t stay the same; it changes regularly, often every month. The new rate is based on a market index, like Treasury rates, plus an extra amount added by the lender.

What else is important to know about the home-buying process?

In a competitive housing market, homes can sell quickly and it's crucial for the buyer to be ready to act fast. Ensure that your financing is lined up and consider keeping extra funds available for closing costs, inspections and appraisals, which can add quickly.

“First of all, I make absolutely certain you get a home inspection before you buy anything and it’s money well spent,” Bridges said. “You might need a new roof, you might need something that’s really expensive, or you might have a health and safety risk like a gas leak. Get your home inspected so you have an idea.”

Staying ready to act quickly also means collaborating with your real estate agent and staying informed about new listings and opportunities as they become available.

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