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<a href="https://better.com/content/vishal-garg-better-ceo/">*Vishal Garg,*</a> *Better Mortgage [Founder and CEO](https://www.forbes.com/sites/dianatsai/2021/10/20/how-bettercom-quietly-became-a-77b-unicorn-personal-insights-from-founder-vishal-garg/?sh=5a1228ab40d0), demystifies the low down payment mortgage.*

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![3-5% down](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F05c282c87bf744a39e0d801413078569)

Becoming a homeowner is a huge milestone in many people’s lives, but it can be hard to know when you’re ready. At Better Mortgage, we've found that many people don't take the next step because of how daunting it can seem to save up for a large down payment.

We want to help you see yourself as a homebuyer by giving you accurate, transparent information about your financing options. In addition to eliminating unfair <a href="https://better.com/content/5-reasons-why-loan-officer-commission-is-bulls-t/">commission structures</a>, lender fees, and <a href="https://better.com/content/dont-take-the-bait-heres-the-reality-of-refi-rates/">bait-and-switch</a> quotes, we work with government-backed investors like Fannie Mae and other reputable banks to offer a variety of loan types, to help people chose the best financing option for them.

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## Considering a 3-5% down payment

For example, we can offer qualified borrowers financing options with as little as 3% down. Now, I know what you’re thinking. That sounds risky. But it’s not – anymore. Before the housing crisis, these types of loans were often offered to people who were at a high risk of defaulting, such as people with extremely high <a href="https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/">debt-to-income ratios</a>. Since then, the mortgage industry has been regulated to protect people from those kinds of predatory loans.

For borrowers with great credit and a steady income, a 3-5% down loan can be a financially sound option, allowing you to start investing and building equity sooner.

## The difference between what you can afford and the size of your down payment

Essentially, you pay for your home with:

- An initial large payment (your down payment)</li>
- Ongoing installments, with interest (your monthly mortgage payment)</li>

Many potential homeowners focus on the first part, which is their down payment. But lenders are also looking at your *future* ability to pay, which is indicated by a steady income and a great <a href="https://better.com/content/how-your-credit-score-affects-your-mortgage/">credit score</a>.

## Let’s look at an example

Let’s say you have high student loan debt, but a stable career with steady income (and the tax returns and pay stubs to prove it). And you live in a city where your monthly rent is high – even higher than what a monthly mortgage payment might be.

In this instance, you may not have a 20% down payment saved up, since most of your income has gone towards rent and paying off student loans. But your income profile, and the fact that you’re already making high rent payments, can be a signal to lenders that you’ll be able to make consistent mortgage payments.

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#### The bigger picture: backed by data

An analysis of historical loan data by Laurie Goodman, Jun Zhu, and Taz George at the Urban Institute shows why government-backed investors like Fannie Mae see relatively little risk in qualifying mortgage loans with down payments as low as 3-5%:

Data shows that credit is a stronger indicator of default risk than down payment size. The percentage of defaults of 5-10% down loans versus 3-5% down is very similar.*

“Of loans that originated in 2011 with a down payment between 3-5 percent, only 0.4 percent of borrowers have defaulted. For loans with slightly larger down payments – between 5-10 percent – the default rate was exactly the same. The story is similar for loans made in 2012, with 0.2 percent in the 3-5 percent down-payment group defaulting, versus 0.1 percent of loans in the 5-10 percent down-payment group.” – Urban Institute

<p><a href="https://better.com/preapprovals/purchase"><img src="https://media.better.com/content/prod/2017/07/default_rates_FICO.jpg"></a></p>

What does this mean for Americans with goals of homeownership? For a couple with $25,000 saved up for a down payment, it could be the difference between being able to put 10% down for a 1-bedroom home that costs $250,000, versus putting 5% down and getting for a 2-bedroom home for $500,000.

## The bottom line

We think if you’re considering homeownership, you shouldn’t have to keep renting just to save up for a large down payment. Government-backed investors like Fannie Mae agree. They want to help more people build equity through homeownership, and they’re doing so by backing loans with as low as even a 3% down payment, for borrowers who fit the profile.

If you’re considering buying a home, we’re here to help you understand your options. Take a few minutes today to explore whether homeownership is a possibility with our <a href="https://better.com/preapprovals/purchase">3-minute basic pre-approval</a>. There is no fee, no obligation, and researching your financial options will not affect your credit score. You can also talk through your options by <a href="https://better.com/schedule-call?loanType=purchase&amp;TRACKINGLOCATION=5pdp&amp;TRACKINGBRANDING=purchase">scheduling a free call</a> with one of our non-commissioned Mortgage Experts.

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<p class="legal"><a href="http://www.urban.org/urban-wire/why-government-sponsored-enterprises-support-low-down-payment-loans-again-no-big-deal">*Why the Government Sponsored Enterprises' support of low-down payment loans again is no big deal</a></p>

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Considering a 5% down payment for your mortgage? We're here to help demystify the low down payment mortgage.

When a 5% down payment isn't a risk

Blog post image for When a 3-5% down payment isn't a risk

When a 3-5% down payment isn't a risk

<p><em>Viral Shah (Better Mortgage’s Head of Capital Markets) explains what he wishes he had known about ARMs when he bought his home.</em></p>

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[![ Wall to Wall Exposed Brick Living Room with Couch, Yellow Chair, Modern Table, Map of Africa on the Wall](https://media.better.com/content/prod/2017/05/image_consideringARM@2x-1.jpg)](https://better.com/mortgage-rates/purchase)

<p>When I bought my home 4 years ago, I got a fixed-rate loan, like <a href="http://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-march-2017">98% of homebuyers</a> do today. My loan officer didn’t even bring up the idea of an adjustable-rate mortgage (ARM) – maybe because ever since the 2008 housing crisis, ARMs have gotten a bad rap.</p>

<p>But knowing what I do now, an ARM would have been the cheaper and more appropriate choice for me, because I knew for certain that I wasn’t going to stay in the home for more than 5-7 years. All in all, I could’ve saved over $5,000 in interest over the last few years if I had chosen differently.</p>

[![ Lock Down a Killer Rate. Start Now](https://media.better.com/content/prod/2017/06/blog_GetBetterMortgage_CTA_DreamhomeG.png)](https://better.com/start)

A lot of people move within 5-7 years. According to the National Association of Home Builders, <strong>40% of homeowners move out after 5-10 years</strong>: <br />

[![ Percentage of Homeowners Who Moved Out After 5-10 Years (Source: National Association of Home Builders)](https://media.better.com/content/prod/2017/05/ARM-blog-1-1.png)](https://better.com/mortgage-rates/purchase)

<h4 id="whatsthedifferencebetweenafixedratemortgageandarm">What’s the difference between a fixed-rate mortgage and ARM?</h4>

<p><strong>Fixed-rate mortgages</strong> offer just that – you get the same, fixed interest rate over the course of your loan (typically 15, 20, or 30 years). No surprises. </p>

<p><strong>Adjustable-rate mortgages</strong> (ARMs) typically offer you a lower rate for an initial fixed period (5, 7, or 10 years). After that initial period is over, the rates will adjust (and typically increase) each year based on market rate factors. Note that there is a predetermined cap that establishes the maximum amount rates can increase each year – so you’ll know the “worst-case scenario" going in. Want to learn more about how ARMs work and how much your rates might go up? Head <a href="https://better.com/content/what-is-an-arm/">here</a>.</p>

<h4 id="isanarmrightforyou">Is an ARM right for you?</h4>

<p>If you’re not planning on staying in your home for longer than 5-10 years, an ARM allows you to take advantage of the initial low rate.</p>

As of 4/13/2017, here’s a sample purchase loan a consumer may qualify for: <br />
[![ Table of 30 Year Fixed and ARM Rates and Corresponding Interest Rates](https://media.better.com/content/prod/2017/05/graph_consideringARM@2x-1.jpg)](https://better.com/mortgage-rates/purchase)

<h4 id="howmuchcouldyousave">How much could you save?</h4>

<p>This table shows the annual and cumulative interest savings for a $300,000 loan, assuming you move out of your home at or before the end of the fixed period. </p>

[![ Annual and Cumulative Savings Through Initial Fixed Period (Versus 30 Year Fixed)](https://media.better.com/content/prod/2017/05/ARM-blog-2.png)](https://better.com/mortgage-rates/purchase)

<h4 id="otherreasonstochooseanarmcrystalballrequired">Other reasons to choose an ARM (crystal ball required)</h4>

<p>Some lenders might suggest additional reasons for choosing an ARM, but we think they can come with more risk. Let’s go over a few of them:</p>

<p>1) You anticipate being able to afford higher payments later on because of your career trajectory, a partner rejoining the workforce, or an expected inheritance.</p>

<p><strong>Why we’re cautious:</strong> Life is unpredictable, and even the most solid plans can fall through. You might want to consider consulting with a financial advisor if you’re trying to figure out whether you’ll be able to afford a higher monthly mortgage bill down the line (using the “worst-case scenario” numbers).</p>

<p>2) You’re banking on <a href="https://better.com/start-refinance">refinancing</a> your loan before or soon after the fixed period ends.</p>

<p><strong>Why we’re cautious:</strong> Again, life – and the economy – can be unpredictable. Just like getting your initial mortgage, a lot of requirements and factors are involved in successfully refinancing your mortgage, which means there’s no guarantee you’ll be able to lock in a lower rate down the line.</p>

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<h4 id="conclusion">Conclusion</h4>

<p>At Better Mortgage, we believe in only recommending loan products that are in the best interest of the buyer. That’s why none of our Mortgage Experts receive commissions – they’re solely here to support you. So, while there are other reasons why an ARM might be appealing, the only case we feel strongly about is the home scenario in which you’re certain that you’ll be selling the house within 10 years.</p>

<p>The great news is if you plan on being in your home for 10 years or less, a 10/1 ARM can save you thousands (almost $7,000 over the 10-year period for a $300,000 loan, as shown above). But if you’re planning on staying in your home long-term, or are uncertain about how long you’ll be there, we recommend doing the math and consulting a financial professional who can help you understand if you'll be able to afford higher mortgage payments in the future.</p>

<p>If you’re curious about what ARM rates are like today, take a look at our <a href="https://better.com/mortgage-rates/purchase">Rate Quote Tool</a>, and if you’d like to talk through your specific scenario with one of our Loan Consultants, you can <a href="https://better.com/schedule-call?loanType=purchase&amp;TRACKINGLOCATION=sycaarm&amp;TRACKINGBRANDING=purchase">schedule a conversation</a> or call us at 888-501-3186. We’re here to help you figure out which option is right for you.</p>

[![ See How Much You Could Save. Check Our Rates.](https://media.better.com/content/prod/2017/05/CTA_consideringARM-green@2x.png)](https://better.com/mortgage-rates/purchase)

Better Mortgage's Head of Capital Markets explains what he wishes he had known about ARMs when he bought his first home.

Adjustable rate mortgage

Blog post image for So you're considering an adjustable rate mortgage

So you're considering an adjustable rate mortgage

<p><em>Viral Shah (Better Mortgage’s Head of Capital Markets) explains how an adjustable-rate mortgage works.</em></p>

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Choosing a mortgage type is one of the many decisions a homebuyer needs to make – and it’s a big one. After the 2008 housing crisis, many buyers were wary of adjustable rate mortgages (ARMs). But in instances where you’re planning on selling your home within 10 years, [they could be the better option](https://better.com/content/so-youre-considering-an-adjustable-rate-mortgage/).

Here’s a quick overview of what an adjustable rate mortgage is:

<h2>How do ARMs work?</h2>

While traditional fixed rate mortgages have the same rate for the entire life of the loan (typically 15, 20, or 30 years), adjustable rate mortgages (ARMs) are a bit different. ARMs have an initial fixed period where you will pay a fixed interest rate, followed by an adjustable period where the interest rate fluctuates. Current conforming ARMs use an index rate called the Secured Overnight Financing Rate (SOFR) to guide these adjustments. 

<strong>Naming:</strong> (Fixed period in years / number of adjustments per year). For example, *10/6m* means 10 year fixed with adjustments every 6 months after that. 

<strong>Fixed period:</strong> You’ll choose from a 5-year, 7-year, or 10-year fixed period, typically based on how long you expect to live in the house. After the fixed period, the rate adjusts twice per year (every 6 months).

<strong>Adjustable period:</strong> After the fixed period is over, the rate will adjust every 6 months based on the following formula: 30 day average of SOFR (Index) + (Margin). Investors set the value of the margin but it is typically between 2.75% and 3%. Regardless of what value is used, the margin always stays the same, but the value of the SOFR index will vary. The SOFR index is maintained by the New York Federal Reserve and can be accessed directly on the NY Fed website or on sites like the Wall Street Journal and its value changes daily. As of 2/22/2021, the 30-day average SOFR was 0.045%, which would mean your ARM loan interest rate could be .045% (Index) + (Margin) or between 2.795% and 3.045%.

<h2>How much can the rate move?</h2>

ARMs have “caps,” which limit the amount that the rate can increase. This protects you against sharp moves if you move into the adjustable period.

<strong>Initial Adjustment Cap:</strong> The most the total rate can increase by in the first adjustment period. Typically 2% for 5/6m ARMs and 5% for 7/6m or 10/6m ARMs.

<strong>Subsequent Adjustments Cap:</strong> The most the total rate can increase by in subsequent adjustments periods. Typically 1%.

<strong>Lifetime Adjustment Cap:</strong> The most the rate can increase above the initial fixed rate — ever. Typically 5%.

For example: If your initial 5/6m ARM fixed rate was 3%, once the fixed period is over, it can’t increase more than 4% every year, nor can it ever exceed 8% in total.

<h5>Example rates based on the current interest rate environment:</h5>

![Example Rates Based on the Current Rate Interest Environment](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fc8f48b0ce4ac43adbb003487ac4f1a6c)
<p class="legal">This table is for illustrative purposes only.</p>

At Better Mortgage, we recommend considering an ARM only if you’re reasonably certain you’re going to sell your house in 10 years or less: [here’s why](https://better.com/content/so-youre-considering-an-adjustable-rate-mortgage/).

If you’re curious about what ARM rates are like today, take a look at our [Rate Quote Tool](https://better.com/mortgage-rates/purchase). We’re here to help you figure out which option is right for you.

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<p class="legal">This blog is for informational purposes only and should not be used for legal or financial advice.</p>

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While traditional fixed rate mortgages have the same rate for the entire life of the loan (typically 15, 20, or 30 years), adjustable rate mortgages (ARMs) are a bit different.

What is an ARM?

Blog post image for What is an ARM?

<p><em>The Loan Estimate is intended to provide a clear and concise summary of the terms and costs associated with any loan. Here’s how to read it with confidence.</em></p>

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<p><br><br> <br />
The Loan Estimate (LE) provides a clear and concise summary of the terms of your loan to help you understand the features, costs and risks associated with your mortgage as required by the Consumer Finance Protection Bureau (CFPB). Before moving forward with any lender, you should be sure to compare and understand your Loan Estimate.  </p>

<h2 id="yourinitialle">Your initial LE</h2>

<p>This is page 2 of sample LE in the CFPB-approved format. Make sure your lender provides an estimate in this format. Anything that looks different is not an official Loan Estimate.</p>

<p><a href="https://better.com/start"><img src="https://media.better.com/content/prod/2016/12/LE-page-2-no-annotation.png"></a> <br />
<em><p style="font-size:1.4rem;">Page 2 of the LE details your loan costs</p></em></p>

<h2 id="tipsforcomparinglesfromdifferentlenders">Tips for comparing LEs from different lenders</h2>

<p>Here are a few things to look out for: </p>

<h4 id="1thirdpartyfeesappearingononelendersleandnotanothers">1. Third-party fees appearing on one lender’s LE and not another’s</h4>

<p>You should raise this with your Mortgage Expert. While the fee amount can vary, the types of third-party fees associated with a loan are fairly constant. One lender may be missing something. </p>

<h4 id="2differencesinloanamountforarefinance">2. Differences in loan amount for a refinance</h4>

<p>A lender may increase your loan amount slightly to create a “<a href="https://better.com/content/no-cost-mortgage/">no closing cost loan</a>”. Borrowing a little more than the payoff on your current loan is one way to offset fees at the closing table, but this is increasing your debt to pay for your closing costs; it does not make them go away.  For an apples-to-apples comparison across lenders, you should get LEs with identical loan amounts.</p>

<h4 id="3promisesofcreditsafterclosethatdonotappearonthele">3. Promises of credits after close that do not appear on the LE</h4>

<p>This is a major red flag. The purpose of the LE is to create transparency and accountability. You lose both by transacting outside of the standard disclosure.</p>

<h4 id="4increasingcostsduringachangeincircumstance">4. Increasing costs during a change in circumstance</h4>

<p>Some lenders may advertise attractive rates and fees for one product, then switch into something less competitive (<a href="https://better.com/content/loan-estimate-101/">bait-and-switch</a>). You should ask about any additional fee and look at the relative competitiveness of the new product by continuing to shop before locking.</p>

<h2 id="abetterway">A Better way</h2>

<p>Better Mortgage is committed to a transparent and efficient mortgage process. Contact us by email (<a href="mailto:hello@better.com">hello@better.com</a>), phone (<a href="tel:888-501-3186">888-501-3186</a>), or chat with us via <a href="https://better.com/">Better.com</a> with any questions about your LE. We are happy to walk you through competing offers and answer any questions. No pressure, no sales — just a fast, easy and transparent process.</p>

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Your loan estimate is a summary of the terms and costs associated with your loan. Learn how to read and understand it with confidence.

A quick guide to your Loan Estimate

Blog post image for A quick guide to your Loan Estimate

<p><em>If you refinance or sell your home in the average time frame, taking lender credits to offset your closing costs (a.k.a. a no-cost mortgage) will save you money in comparison to paying points.</em></p>

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<p><br> <br />
“Taking credits” refers to the practice of accepting a higher interest rate (and therefore higher monthly payments) in exchange for cash to offset your closing costs. If you take enough credits to offset all closing costs, this results in a “no-cost mortgage.” </p>

<p>The flip side of taking credits is “paying points,” which means paying a percentage of your mortgage balance upfront in exchange for a lower interest rate and lower monthly payments. </p>

<p>The typical cost of changing your rate by 0.125% is 0.625% of your loan amount. So on a $400,000 loan, if you took a rate increase of 0.125%, you would receive $2,500 in credits. If you reduced the rate by 0.125%, you would pay $2,500 in points.</p>

<blockquote>
  <p>There are many factors that determine whether paying points or taking credits is right for you. However, perhaps the most important one is how long you keep your mortgage without fully repaying it by selling your home or refinancing.</p>
</blockquote>

<p>By taking credits, you will save money early on by reducing your closing costs. But there will be a time in the future when you will lose money (compared to paying points) by paying the higher interest rate. The gamble is whether you get out of your mortgage before the time when you break even.</p>

<h4 id="figureifyoutakecreditsyouwillsavemoneyearlyinyourmortgagetermbyoffsettingclosingcosts">Figure: If you take credits, you will save money early in your mortgage term by offsetting closing costs.</h4>

[![ Graph: Years on X Axis and Total Savings If You Pay Points on Y Axis](https://media.better.com/content/prod/2016/09/concept-take-credits.png)](https://better.com/start) <br />
<em><p style="font-size:1.4rem;">This graph illustrates the concept of taking credits.</p></em>

<p>By paying points, you will lose money at the start by paying the closing costs. But there will be a time in the future when you break even and start to save money by paying the lower interest rate. If you leave your mortgage before that time, you lose money. The gamble is whether you will stay in your mortgage long enough to reach the time when you break even. </p>

<h4 id="figureifyoupaypointsupfrontyouwilllosemoneyearlyinyourmortgageterm">Figure: If you pay points upfront, you will lose money early in your mortgage term.</h4>

[![ Graph. Years on X Axis and Total Savings If You Pay Points on Y Axis](https://media.better.com/content/prod/2016/09/concept-pay-points.png)](https://better.com/start) <br />
<em><p style="font-size:1.4rem;">This graph illustrates the concept of paying points.</p></em>

<h2 id="payingpointswasthewrongdecisionformostborrowers">Paying points was the wrong decision for most borrowers</h2>

<p>Historical data tells us that for most borrowers in the last 25 years, paying points has been a bad decision. Recent research using data from 1990-2015 found that on average, borrowers have kept their mortgages only five years (<em>Agarwal, Ben-David, and Yao (2016), Journal of Financial Economics</em>). </p>

<p>Historical data from Freddie Mac is consistent, showing the majority of borrowers have refinanced, sold, or otherwise closed their mortgage within six years.</p>

<h4 id="figurethemajorityofloansinthefreddiemacdatasethavebeenactivelessthansixyears">Figure: the majority of loans in the Freddie Mac dataset have been active less than six years</h4>

[![ Graph. Number of Years Since Origination on X Axis and Loans Still Active (%) on Y Axis](https://media.better.com/content/prod/2016/09/loans-active.png)](https://better.com/start) <br />
<em><p style="font-size:1.4rem;">Fraction of loans still active out of the cohort originated in any given year. For instance: out of the loans originated in 2008, less than 40% were still active four years later. The other 60+% had refinanced, foreclosed, or sold.</p></em>

<blockquote>
  <p>What this means is that those who paid points usually left their mortgages before the break-even line, and therefore lost money. Had they taken credits (or a no-cost mortgage) instead, they would have saved money.</p>
</blockquote>

<p>While you might think this finding is due to the time-period studied and interest rate trends over that time, the authors of the research also ran an ex-ante simulation. Given the break-even nature of paying points, those who paid points should have been less mobile on average (e.g., slower terminations for non-rate-based reasons) than those who did not pay points. However, the research concluded that points-payers did not keep their mortgages a statistically different amount of time than non-points-payers.  </p>

<h2 id="sowhenshouldyoupayforalowerrate">So, when should you pay for a lower rate?</h2>

<p>There are a few scenarios where it does make sense to pay out of pocket for points:</p>

<ul>
<li>You think it’s really unlikely that you will move or refinance for a very long time.</li>
<li>Your projected income is going down in the future, meaning you would not be able to qualify for a similar mortgage.</li>
<li>Your tax rate this year is much higher than what you expect in future years. You want to deduct as much as possible when your tax rate is high, and points are deductible against income in the year you get the mortgage.</li>
</ul>

[![ Got More Questions? Our Free Guide Has the Answers. Sign Up to Download](https://media.better.com/content/prod/2017/10/FTHB_adforblogB-1.png)](https://better.com/content/the-guide)

<h2 id="runyourownscenario">Run your own scenario</h2>

<p>In the end, whether to pay points or take credits is a complex question. Things you probably rarely consider (like your future marginal tax rate) affect whether you should pay points or take credits in your particular situation. To make it a bit easier, we’ve provided a calculator that will help you explore different scenarios and make your own determination.<sup id="fnref:1"><a href="#fn:1" rel="footnote">1</a></sup> </p>

<p>The projected break-even time will be your guide. If you are considering paying points, you should do so only if you have a high level of certainty that you’ll stay in the mortgage longer than that. You are confident you won’t move, sell your house, pre-pay your mortgage, refinance for a better rate, take cash out for renovations, etc.</p>

<p>If you think any of the above scenarios might happen sooner than that, taking credits is likely a better option.</p>

<div id="widget-element"></div>  

<script src="https://media.better.com/widgets/pay-points.js"></script>

<h2 id="getaratequote">Get a rate quote</h2>

<p>You can <a href="https://better.com/start">get a personalized rate quote</a> from Better Mortgage in minutes, without affecting your credit score. </p>

[![ A Better Mortgage Starts with Better Information. Get a Better Mortgage](https://media.better.com/content/prod/2017/05/blog_nocostmortg_CTA@2x-1.png)](https://better.com/start)

<p>Every rate quote will provide options for paying points and taking credits, including a no-cost option. Try it and see which option is best for you.</p>

<div class="footnotes"><ol><li class="footnote" id="fn:1"><p>The calculator is provided for demonstrative purposes only. <a href="#fnref:1" title="return to article">↩</a></p></li></ol></div>

Historical data tells us that for most borrowers in the last 25 years, paying points has been a bad decision.

Why a no-cost mortgage is better

Blog post image for Why a no-cost mortgage has historically been the best choice for most borrowers: try our interactive tool

Why a no-cost mortgage has historically been the best choice for most borrowers: try our interactive tool

<p>Have you ever wondered why buying or refinancing a home is so outdated and complex? You’re not alone. Millions of people go through the mortgage process each year. It is a cornerstone of our economy. Families everywhere build their lives around this asset. For almost everyone, their home represents the biggest financial transaction of their lives.</p>

<h4 id="andyetthemortgageindustryissofarbehind">And yet the mortgage industry is so far behind.</h4>

<ul>
<li>It’s behind on technology. The best-in-class origination software was written in the ‘90s.</li>
<li>It’s needlessly unclear. Got that PUD / Condo Cert request? How about your VVOE or WVOE?</li>
<li>Worst of all, it’s not very user-friendly. Why does it take so many phone calls just to get pre-approved?</li>
</ul>

<p>Everywhere we look we see legacy infrastructure, needless middlemen, and frustrating pain points. It’s clear that the process doesn’t work for the busy, modern-day, mobile consumer.</p>

<p>Some lenders pretend as if the internet doesn’t even exist.</p>

<p>We launched Better Mortgage with the goal of building a fundamentally different mortgage company; one that is simple, transparent, and completely online. Consumers are clamoring for a simpler mortgage experience. We believe better technology is the way.</p>

<h4 id="atbettermortgagewerebringingmortgagesintothe21stcentury">At Better Mortgage, we’re bringing mortgages into the 21st century.</h4>

<p>First we assembled a world-class engineering team. Our team hails from places like Google, Microsoft, and Spotify. Then we acquired an existing mortgage bank and rebuilt it from the ground up, rewriting traditional assumptions at every step.</p>

<p>Since we are a technology company at heart, our team is constantly improving the process as we learn from our customers.</p>

<p>Today we’re proud to offer a fully re-engineered mortgage experience that puts users first. In 2016, no one should have to play phone tag. No one should have to fax a document. And no one should have to pay thousands of dollars in commission to a loan officer who mostly slows the process down. <br />
<br>  </p>

<h4 id="sowhatdoesthatmeanforyoubr">So what does that mean for you?<br></h4>

<p><br>  </p>

<h3 id="0commission">0% commission</h3>

<p>Communicate on your terms. Work with our non-commissioned Mortgage Experts by chat, phone, email, or even text — we won’t call you unless you need us to (unless it’s really urgent). At Better Mortgage, you work with support, not sales.</p>

<h3 id="100online">100% online</h3>

<p>Complete the entire process online — make progress 24/7. Nothing should slow you down. </p>

<p>Be efficient and paper-free. Save time by e-signing documents, linking bank accounts, and securely uploading files.  </p>

<h4 id="3minutepreapproval">3-minute pre-approval</h4>

<p>What used to take weeks now takes minutes. With Better Mortgage, applying for a pre-approval for a refinance or new mortgage only takes 3 minutes. And it won’t affect your credit score.</p>

[![ A Better Mortgage is a Modern Mortgage. Get Pre Approved Now](https://media.better.com/content/prod/2017/05/blog_whatisBmortg_CTA@2x.png)](https://better.com/start)

We launched Better Mortgage because the mortgage industry is broken. That's why we're making homebuying smarter, faster, and better from beginning to end. 

What is Better Mortgage?

Blog post image for What is Better Mortgage?

![timeline hero](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F2441b26839fa46c1b6e11e127df42512)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">The steps involved in the homebuying process</p>

<p class="learnfont">How long you can expect the homebuying process to take</p>

  <p class="learnfont">What your role will be in each step of the process</p>

  </div>
  <br><br>

You’ve been thinking about buying a home for months—maybe even years. Now that you’re ready, you’re probably wondering how long it will take until you get to pick up the keys. Of course, the time it takes to find a home you love is going to vary, but the average timeline to close a mortgage is just [42 days](https://www.elliemae.com/about/news-reports/press-releases/refinances-soar-as-30-year-note-rate-continues-to-decline-in-august-according-to-latest-ellie-mae-origination-insight-report#:~:text=About%20the%20Ellie%20Mae%20Origination%20Insight%20Report&text=The%20closing%20rate%20is%20calculated,months%20from%20application%20to%20closing. "external"). At Better Mortgage, our modern online process makes it even faster; our average closing time is just [32 days](https://better.com/with/claims). 

To help you know what to expect at each step along the way, we’ve laid out a typical timeline for a homebuying journey—along with some tips and insights to help keep things moving smoothly.  Here’s what you can expect.  

## Homebuying timeline

- [Mortgage pre-approval  – 1-3 days](#1)
- [Home search – 1-20 weeks](#2)
- [Make an offer on a Home – 1-2 days](#3)
- [Mortgage application – 1 hour ](#4)
- [Loan processing – 3-4 weeks](#5)

    - [Appraisal – 1-7 days](#6)
    - [Inspection – 1-7 days](#7)
    - [Title search & title insurance – 1-2 weeks](#8)
    - [Underwriting – 10-15 days](#9)

- [Closing disclosure – 1 day](#10)
- [Final walkthrough – 1-4 hours](#11)
- [Home closing – 1 day](#12)

<div id="1"></div><h2>Mortgage pre-approval: 1–3 days </h2>

<h4 class="subhead">(As little as 3 minutes with Better Mortgage)</h4>

While most homebuyers kick off their search by browsing listings online, it's smart to get [pre-approved](https://better.com/content/what-is-a-mortgage-pre-approval/) for a loan before you start going to open houses. This will help you determine your price range and give you more leverage when you’re ready to make an offer. Most sellers ask for a pre-approval letter as proof that you’ll be able to receive financing if your offer is accepted. In most cases, getting a pre-approval takes 1 to 3 days. However, with the Better Mortgage [online pre-approval](https://better.com/preapprovals/purchase) system, you can get your letter in as little as 3 minutes. 

First, we’ll ask you about your income and assets and do a soft credit pull (don’t worry, this won’t affect your credit score). Next, our technology will instantly match you with the best mortgage options available based on your information. And that’s it—you now have a free, no commitment pre-approval letter that gives you an accurate estimate of your homebuying potential.

<br>
 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapprovals/purchase">Learn more</a>  
 </div> 
<br>

<div id="2"></div><h2>Home search: 10 weeks</h2>

Once you have a pre-approval letter in-hand, get ready for the fun part: house hunting. It’s time to start looking at listings and work with your real estate agent to pick the homes that catch your attention. Incidentally, if you need help selecting a qualified, knowledgeable real estate agent to help in your search, our affiliate at [Better Real Estate](https://better.com/realestate) can match you with a top agent in your area. Plus, if you work with a Better Real Estate agent and choose to finance with Better Mortgage, you could save $2,000 on closing costs*. This is just one of many ways we’re making buying your new home more affordable.

It’s hard to predict how long it will take to find the right home. You could very well get lucky and find your dream home on day one—or it could take several months. Ultimately, the timing will depend on several factors, like available inventory in your desired area and your specific preferences. The National Association of Realtors’ [2020 Generational Trends Report](https://www.nar.realtor/sites/default/files/documents/2020-generational-trends-report-03-05-2020.pdf "external") found that homebuyers typically look at around 9 listings over 10 weeks before they find the right one. 

<div id="3"></div><h2>Make an offer on a home: 1–3 days</h2>

Ok, so now you’ve found the one. From here, it may only take a few hours to discuss the terms of your offer with your real estate agent before it’s submitted. But, it’s after you submit the offer that the real nail-biting begins. Sellers aren’t required to respond within a specific period of time, but most will either accept, reject, or counter your offer within 24 to 48 hours. In cases of multiple offers or a foreclosure, things could take a bit longer. 

Communication mostly happens over the phone between buying and selling agents, so you’ll likely be waiting on your agent for the latest status updates. Once you hear back, you may have to negotiate back and forth on things like price, [contingencies](https://better.com/content/what-is-a-mortgage-contingency-and-why-is-it-important/), and closing date until you come to an agreement with the seller. 

<div id="4"></div><h2>Mortgage application: 1 hour</h2>

When the seller accepts your offer (congrats!), you’ll start the process of officially getting approved for your home loan. The application usually asks questions about the property and [occupancy type](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) as well as your employment history and finances. Within 3 days of submitting your application, a lender must provide you with a “[loan estimate](https://better.com/content/a-quick-guide-to-your-loan-estimate/)”—which is a standardized document that contains your monthly payment, interest rate, and other associated costs of your mortgage. 

From here, you’re ready to make the purchase official! First you’ll select the right home loan type and term and then [lock in your interest rate](https://better.com/content/why-locking-your-mortgage-rate-wont-box-you-in/). Then head through the processing and closing of your loan and onto owning your dream home.

PS: We’ve expedited the process at Better Mortgage, so you can complete your online application and lock your rate in as little as an hour—and we provide an instant loan estimate all the way back at pre-approval.

<br>
 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapprovals/purchase">Learn more</a>  
 </div>
<br>

<br>

![timeline graphic 3](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F15ea74bf4a434d6f9557ce11f0ca826a)
<p class="legal">*for illustrative purposes only, closing times may vary.</p>

<div id="5"></div><h2>Loan processing: 3–4 weeks</h2>

Once you’ve submitted your loan application, it moves into processing. In this phase, your lender will give you a [list of documents](https://better.com/content/what-documents-will-i-need-for-my-mortgage/) that you need to provide so they can verify all of the information you provided in your application. The quicker you submit them to your loan processor, the quicker your file will move along. 

Processing includes a few steps that often happen simultaneously, including your appraisal, inspection, title search, and underwriting. Here’s what to expect during each: 

<div id="6"></div><h4>Home appraisal: Up to 1 week</h4>

As soon as you pay for your appraisal and lock in your interest rate, your lender will order an appraisal. This is to determine the fair market value of the home you’re about to purchase—in other words, how much it’s really worth. Among other things, appraisers review recent comparable sales of similar homes in your area (aka “comps”) to determine the home’s true value. This report may take a few days to get back. An appraisal is important to ensure that neither you nor your lender are paying more than the home is worth.

<div id="7"></div><h4>Home inspection: Up to 1 week</h4>

A home inspection is a review of the overall condition of a home. It’s a worthwhile step because it can help you catch costly issues or needed repairs before moving forward with the sale. Depending on what’s found, you may choose to request repairs, renegotiate, or cancel the purchase agreement altogether.

If inspections are a part of your contingencies (meaning they’re required for the sale to move forward), these negotiations must take place within the timeframe listed in your contract—so it’s important to get these going as early as possible. The inspections themselves usually only take a few hours, but it can take several days to receive the reports back from the inspectors. Once you have them in-hand, you can determine how to move forward. Perhaps you want a broken window fixed or a handrail replaced—just make sure you know what repairs you’re willing to take on after the home is fully yours. 

<div id="8"></div><h4>Title search and title insurance: 1–2 weeks</h4>

While the inspectors and appraisers are busy with their work, your agent (or in some cases your attorney or loan processor) will order a title search and title insurance. In real estate, a title refers to the legal ownership of the home. A title search is done to ensure that the seller can transfer property ownership to you free and clear. Title issues can arise if there are any outstanding judgments or liens against the current or previous owners for things like unpaid child support or owed taxes. If potential issues are found, then the seller would be responsible for resolving those before the sale can move forward.

Title insurance is designed to protect you and your lender from exactly those kinds of surprises. [Better Settlement Services](https://better.com/title) can work hand in hand with Better Mortgage to ensure quick and transparent processing of your title insurance.

<div id="9"></div><h4>Underwriting: 10–15 days</h4>

While your title, appraisal, and inspection work is being completed, your lender will thoroughly review all the information you provided to verify that it is accurate. They’ll also calculate your [debt-to-income ratio](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/) to determine the risk level of approving you for the loan. While this process usually takes around 10 to 15 days, it may take longer depending on your financial circumstances. For example, if you have multiple income sources, such as rental or interest income, or you are pulling your down payment from various asset accounts, or [through a gift letter](https://better.com/content/how-to-use-a-gift-letter-for-your-mortgage/), then it could take a little longer for an underwriter to verify all of this.

Once everything is accepted, you’ll receive a conditional approval. This means that you’ll be approved for a loan once certain conditions are met. These might include additional documentation, the sale of your current home, or results from an appraisal. When all the steps of the process are completed, you’ll receive a “clear to close” notice, meaning you’ve been fully approved and can move forward with closing—the last step before the home is yours! 

<div id="10"></div><h2>Closing disclosure: 1 day</h2>

3 days before closing, your lender must provide you a document known as a “[closing disclosure](https://better.com/content/a-guide-to-understanding-your-closing-disclosure/).” The 3-day window gives you time to compare your final terms and costs to those estimated in the loan estimate you previously received. The closing disclosure will contain the exact figures of your monthly mortgage payment, as well as how much it will cost to close on your loan. If you have any questions, this is the time to ask your lender before you go to the closing table.

<div id="11"></div><h2>Final walkthrough: 1–4 hours</h2>

Before closing, it is recommended you and your agent perform a final walkthrough. This is your chance to verify the home is in a satisfactory condition since your offer was first accepted. You should ensure all the correct appliances and fixtures are still in the home and that any negotiated repairs were completed. If there are any problems, your agent can help you get them fixed. If all looks great, then you’ll be ready to close. 

<div id="12"></div><h2>Home closing: 1 day</h2>

Congratulations! You made it to the last step of the loan process. During closing, you’ll be expected to sign paperwork. Then, your lender will transfer the funds to the home seller and initiate your loan, and you’ll (finally!) get the keys to your new home. The closing process usually takes an hour or two, but in some states, funding may happen a day or so after the closing date. After closing, you’ll officially be a homeowner. Time to celebrate!

Ready to start the process of buying a home? Visit Better Mortgage today to apply for a pre-approval. 

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapprovals/purchase">Learn more</a>  
 </div>
<br>
<p class="legal">*See <a href="https://better.com/faq/rates/whats-the-fine-print-better-real-estate">Better Real Estate discount fine print</a>.</p>

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Explore our detailed home buying process timeline to understand each step from pre-approval to closing and learn how to move forward with confidence.

Home Buying Process | Step by Step Timeline

Blog post image for Your timeline for the homebuying process

Your timeline for the homebuying process

![A comprehensive guide to a second home loan](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F5fd9119897cd43f988df2db8824d200b)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">Second homes, or vacation homes, must meet specific guidelines to be eligible for a second home loan.</p>

<p class="learnfont">Second home mortgage qualifications are typically more strict than for a primary residence.</p>

  <p class="learnfont">Beyond a mortgage, several alternative financing options can help you pay for your second home.</p>

  </div>
  <br><br>
<h2 style="margin-bottom:24px;">Table of contents</h2>
<ul>
    <li><a href="#1">What is a second home mortgage loan?</a></li>
    <li><a href="#2">Things to Consider When Taking Out a Mortgage Loan for a Second Home</a></li>
    <li><a href="#3">Second home loan mortgage requirements</a></li>
    <li><a href="#4">Alternative ways to finance a second home</a></li>
    <ol style="margin-left:24px">
        <li><a href="#5">Home equity line of credit (HELOC)</a></li>
        <li><a href="#6">Cash-out refinance</a></li>
    </ol>
    <li><a href="#7">How to Buy a Second Home With a Mortgage: The process</a></li>
    <ol style="margin-left:24px">
        <li><a href="#8">Get pre-approved for a second home mortgage loan</a></li>
        <li><a href="#9">Work with a local agent</a></li>
        <li><a href="#10">Hunt for your new home</a></li>
        <li><a href="#11">Make an offer</a></li>
        <li><a href="#12">Close on your mortgage</a></li>
    </ol>
    <li><a href="#13">Get a second home loan with Better Mortgage</a></li>
</ul>
<br>

If there’s a special place in your heart you frequently visit, then you may be ready to ditch hotel rooms and rentals and buy a more permanent place of your own. Second homes can serve a variety of purposes, from vacation spots to practical dwellings in prime locations.

Here’s how second homes differ from other property types, how second mortgages work, and what you can expect from the buying process once you’re ready to get started.

<div id="1"><br></div>

## What is a second home mortgage loan?
A second home loan is a mortgage used to finance a secondary or vacation residence. 

Second home loans differ from those used for [primary residences and investment properties](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) because each property type represents a different level of risk for lenders. For instance, because you’re not dependent on your second home as a primary place to live, lenders assume you may be more likely to stop making mortgage payments if you fall on hard times. 

For a property to be [considered a second home](https://better.com/content/buying-a-second-home/) and deemed eligible for a second home loan, it must meet the following guidelines:

- The home must be a single-unit dwelling.
- The property must be suitable for year-round occupancy, even if you only intend to use it for part of the year.
- You’re required to have exclusive use of the property, meaning no long-term leases or timeshare scenarios.
- The home may not be under the control of a property management company.
- In most cases, it must be located a certain distance from your primary residence.

You may be able to rent out a second home when you’re not using the property, but rentals are typically restricted to 180 days per year. And any projected rental income cannot be considered for mortgage qualifying purposes.

[Unlike second property mortgages, investment property mortgages’](https://better.com/content/second-home-vs-investment-property) allow for even longer rental terms (year-round), but also come with the toughest qualifying guidelines because they tend to have higher delinquency rates than other occupancy types. Lenders will typically expect that you are truly using the property as a second home and not a full investment property that allows for tenancies longer than 180 days.

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

<div id="2"><br></div> 

## Things to consider when financing a second home
While [purchasing a second home](https://better.com/content/buying-a-second-home/) is an exciting adventure, financing requirements can be a bit more strict than those for a primary mortgage. Second mortgages also tend to come with higher interest rates because of the increased risk they represent to lenders.

<div id="3"><br></div>

## Second home loan mortgage requirements

Here’s what your typical mortgage requirements [qualify for a second home loan](https://better.com/content/buying-a-second-home/) are:

- At least 20% of the purchase price as a down payment
- A lower debt-to-income ratio, usually less than 43%
- A good-to-excellent credit score
- Proof of enough cash reserves to cover several months’ worth of mortgage payments

<div id="4"><br></div>

## Alternative ways to finance a second home
If you think it will be a challenge to get a second mortgage based on the requirements above, or you’d prefer a different way to pay, there are other alternatives to consider. These options will allow you to leverage the equity you’ve built up in your primary residence, and use it toward your second home.

<div id="5"><br></div>

### Home equity line of credit (HELOC)
A [home equity line of credit](https://better.com/content/when-and-why-would-i-need-second-mortgage) allows you to borrow against the equity from your primary home on an as-needed basis and pay it off with interest over time. It works similarly to a credit card where you can borrow up to a specified credit limit, and the amount gets replenished as you make payments. 

Keep in mind that because HELOCs are secured by your primary residence, your lender may be able to foreclose on your home if you stop making payments.

<div id="6"><br></div>

### Cash-out refinance
A [cash-out refinance](https://better.com/content/guide-to-cash-out-refinance) is similar to a traditional refinance in that you replace your current primary mortgage with a brand new one. However, with a cash-out refi, you tap into your current home’s equity to free up extra cash for your new second home. 

Of course, this will add to your existing mortgage balance by increasing the amount you owe, which may result in a higher mortgage payment. Also, when you refinance, you typically reset the payoff clock on your mortgage, especially if you’re getting a new 30-year home loan, so going this route for a second home may take you longer to pay off your first mortgage. 

<div id="7"><br></div>

## How to buy a second home with a mortgage: The process
If you decide to move forward with a second home loan, then here are the steps you can expect from the homebuying and mortgage process. 

<div id="8"><br></div>

### Get pre-approved for a second home mortgage loan
Before you start shopping around and going to open houses, you’ll want to confirm [how much you can afford](https://better.com/how-much-home-can-i-afford) with Better Mortgage to spend. A [pre-approval](https://better.com/content/how-to-get-pre-approved-for-a-mortgage) can give you an idea of the amount you’ll be approved to borrow. 

Not all lenders offer second home financing. But luckily, Better Mortgage does! With our online process, you can get pre-approved in as little as 3 minutes, without affecting your credit score. 

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

<div id="9"><br></div>

### Work with a local agent
Once you’ve been pre-approved, you’re ready to connect with a [Better Real Estate Agent](https://better.com/with/find-an-agent). Because you’ll likely be buying a second home in a different area from where you currently live, it’s a good idea to interview a few local agents. They should be able to answer your questions about various neighborhoods, traffic patterns, and local events and help guide you through your search.

<div id="10"><br></div>

### Hunt for your new home
After connecting with a [Better Real Estate Agent](https://better.com/with/find-an-agent), it’s time for the fun part: shopping for homes. Think about taking a trip to the area where you want to buy and asking your agent to set up multiple showings to make the best use of your time.

<div id="11"><br></div>

### Make an offer
Once you’ve found the perfect second home, it’s time to [make an offer](https://better.com/content/how-to-make-an-offer-on-a-home). You’ll work with your agent to decide how much to offer, draw up the paperwork, and negotiate with the seller. If your offer is accepted, you’ll be ready to move on to the last step in the process.

<div id="12"><br></div>

### Close on your mortgage
[Most homes close within 1-2 months](https://www.forbes.com/advisor/mortgages/how-long-does-it-take-to-close-on-a-house/ "external") of when the seller first accepted the offer. During this time, you’ll have any requested inspections, receive an appraisal report, complete your mortgage documentation, and attend a final walk-through.

Then, you’ll be ready to head to closing where you and the seller will sign paperwork and your lender will send over the necessary funds. At the end, you’ll be handed the keys and officially be the proud owner of a second home and you can close 10 days faster than the industry average with Better Mortgage.

<div id="13"><br></div>

## Get a second home loan with Better Mortgage
Buying a second home is an exciting opportunity. But before you dive in, it helps to know exactly how much second home you can afford. 

Our pre-approval process takes as little as 3 minutes and can give you the confidence to make an offer on your second home.

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

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Thinking of buying a vacation home? Find out the requirements the property must meet to be eligible for a second mortgage. 

A Comprehensive Guide to a Second Home Loan

Blog post image for A comprehensive guide to a second home loan

A comprehensive guide to a second home loan

![Learn about a good debt-to-income ratio for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fed9faca9999f4ad2aea95c52bcba5236)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">What a debt-to-income (DTI) ratio is</p>

<p class="learnfont">Why DTI matters when buying a home</p>

  <p class="learnfont">How to calculate your debt-to-income ratio</p>

  <p class="learnfont">What mortgage lenders consider a good DTI and how to lower yours</p>

  </div>

## Table of contents

- [What is a debt-to-income ratio for mortgages?](#1)
- [How to calculate debt-to-income ratio for a Mortgage](#2)
- [DTI Requirements by Mortgage Type](#3)
- [What is a good debt-to-income ratio for a mortgage?](#4)
- [Conventional loan DTI requirements](#5) 
- [FHA loan DTI requirements](#6)
- [How to improve your DTI ratio](#7)

When you apply for a mortgage or any other type of loan, the top three things lenders look at are your income, your credit score, and your debt-to-income ratio, or DTI.
The first two are fairly self-explanatory—but what is DTI? And how do lenders use it in the mortgage process?

In short, your DTI is the balance between all the money you have coming in every month (income) and how much you’re obliged to pay every month to creditors (debt). This helps lenders know how safe or risky it would be to approve your loan.

Below, we’ll help you understand all the factors that make up your DTI, how to calculate it for yourself, and how to optimize it to get the best terms in your mortgage.

<div id="1"></div><h2>What is a debt-to-income ratio for mortgages?</h2> 

A DTI ratio simply represents how much of your gross monthly income is spoken for by creditors, and how much of it is left over to you as disposable income. 

It’s most commonly written as a percentage. So, for example, if you pay half your monthly income in debt payments, you would have a DTI of 50%. 

<div id="2"></div><h2>How to calculate debt-to-income ratio for a Mortgage</h2> 

Okay easy enough, but your ratio is likely not as clear-cut as “half your income” (and, as you’ll see later on, ideally it’ll be much less). How do you calculate your debt-to-income ratio? There’s math involved, but thankfully it’s pretty basic (no trigonometry required).

Simply divide all your monthly debt payments by your gross (pre-tax) income, and then multiply that number by 100. This will give you your DTI percentage.  

![Formula for calculating your debt-to-income ratio](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F16baf6fd48da4deea516590cbeed3ca6)

In some cases, what constitutes “income” and “debts” is clear-cut. In other cases, not so much. Generally, lenders follow these guidelines for what to include for each. 

__Debt__ includes:

- Future or estimated monthly housing expenses (mortgage payment, homeowners insurance, property taxes)

- Student loans

- Auto loans

- Personal loans

- Minimum required credit card payments 

__Income__ includes:

- Pre-tax monthly salary (determined by dividing your annual salary by 12)

- Income from additional jobs or side hustles

- Revenue from rental property or other investments

- Regular income from annuities, trust funds, and retirement accounts

- Any child support or alimony payments you receive

Let’s look at a real-world example:

![How to calculate your debt-to-income ratio for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fa8e85d916c06432988ffc7343ae72bcd)

<p class="legal">The above scenario is for illustrative purposes only.</p>

<div id="3"></div><h4> DTI Requirements by Mortgage Type</h4>

Different types of mortgages have their own DTI requirements. For example, at Better Mortgage, the maximum DTI for FHA loans is 55%, and 50% for Conventional loans, while VA loans do not have a set maximum. It's important to understand these requirements when considering different mortgage options.

<div id="4"></div><h2>What is a good debt-to-income ratio for a mortgage?</h2> 

The lower your DTI, the better—this means less of your income is tied to recurring debt payments, and you’ll likely be more able to continue making payments on time even if you experience a minor financial setback. Borrowers with higher debt obligations relative to their incomes are less able to absorb those setbacks, and are at greater risk of defaulting on their loan. This is why high DTI is the [#1 reason](https://www.corelogic.com/intelligence/buy-stories/debt-to-income-is-the-number-one-reason-for-denied-mortgage-applications/ "external") mortgage applications get rejected.

So, what’s the magic number when it comes to DTI? Well, it varies slightly based on the [type of mortgage](https://better.com/content/types-of-mortgage-loans/), the lender, and other aspects of your financial profile.

Typically, though, most lenders prefer to see a DTI of under 36%. In other words, the total of your monthly debts, including your estimated monthly mortgage payment, will be less than 36% of your monthly gross income. However, it may be possible to get a mortgage with a DTI of up to 50% depending on the lender. If you have a DTI of 50% or higher, then it could be challenging or even impossible to get approved for a mortgage until you [lower your debt-to-income ratio](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/).

![Debt-to-income (DTI) ratio brackets for a mortgage](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F53b282d1d03741d4a43ff67b4718aa51)

<div id="5"></div><h4>Conventional loan DTI requirements</h4>  

A [conventional mortgage](https://better.com/content/conventional-loan-requirements/) is a home loan offered by a private lender—such as a bank or a mortgage company. Private lenders tend to have a little wiggle room when it comes to DTI, depending on the exact loan you’re applying for and your personal situation. But that wiggle room can only go so far, because DTI requirements are typically based on policies created by government-backed lenders like [Fannie Mae](https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios) in order to protect customers. 

While many lenders require a DTI of no more than 43%, some lenders, including Better Mortgage, can provide mortgages to borrowers with DTIs up to 50%. This means even if your DTI is 49.999%, you could be eligible for a home mortgage loan.

<div id="6"></div><h4>FHA loan DTI requirements</h4>

[FHA loans](https://better.com/content/fha-homeready/) are mortgages backed by the Federal Housing Administration (FHA) and offered by an approved list of lenders (including Better Mortgage). The FHA is a government organization that insures these loans if their borrowers default. 

FHA mortgages require a lower minimum down payment and credit score than many conventional loans. This flexibility helps make homeownership more attainable for first-time homebuyers or those with lower income levels who may be ineligible for conventional loans. 

The maximum DTI for FHA loans is usually up to 50%, though this [may go higher](http://www.fhahandbook.com/debt-ratios.php "external") if you can meet other compensating factors. 

<div id="7"></div><h2>How to improve your DTI ratio</h2>

If you’ve run the numbers and you’re concerned that your DTI isn’t as low as you’d like it to be, there are two main ways you can decrease it: reduce your debt or increase your income. [Lowering your DTI](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/) can make the mortgage process go smoother, so it might be worthwhile if you have time before you apply for a new mortgage or refinance. 

Here are a few DTI reduction strategies to consider:

- Pay down or pay off your car loan before applying for your mortgage.

- Start paying off your credit cards in full, one by one. (Just don't close the cards after you pay them off, as this can hurt your credit score.)

- If possible, refinance or consolidate current loans to reduce your monthly payments.

- Consider adding a [co-borrower](https://better.com/content/should-you-add-a-co-borrower-to-your-mortgage/) with a low DTI to your loan.

- Pick up a side gig or part-time job to help pay down debt.

- Expecting a raise or promotion in the next few months? Consider waiting to apply until it goes through.

- Consider using some of your down payment savings to pay down debt. Just make sure you’ll meet down payment guidelines, which can be as little as [3% to 5%](https://better.com/content/5-percent-down-payment/).

## Get clarity on your DTI with a pre-approval

At Better, we want you to be as prepared for buying a home and the mortgage process as possible.

Applying for a [pre-approval](https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=what-is-good-dti) takes as little as 3 minutes and will provide you with a clear picture of how much you can afford. You’ll undergo a soft credit check (which doesn’t affect your score) that allows our underwriters to look at your debts, income, and credit in detail to obtain a more accurate picture of your DTI.

Although your DTI ratio is just one important factor to consider when buying a home, carrying less debt relative to your income will make it easier to get a mortgage and help ensure you’ll be able to afford your home for years to come.

Better Mortgage can help you understand your DTI and the financing options available to you. Start your pre-approval process today.

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=what-is-good-dti">Get pre-approved</a>  
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Learn all about what a debt-to-income ratio (DTI) is, what a good debt-to-income ratio looks like, and why it matters when taking out a home mortgage.

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