How buying a home and a mortgage work in the US: the basics for immigrants

For many families, owning a home is the single biggest financial decision, and it is usually done through a mortgage. Below, what a mortgage is, how much down payment is needed, the role of the credit score, FHA loans, extra costs and the options available to immigrants are set out using only official and broadly accepted sources. This is general information, not financial or legal advice.

What a mortgage is

A mortgage is a loan from a bank or other lender to buy a home, repaid over many years together with interest. The home serves as collateral for the loan until it is paid off. There are two main types: fixed-rate — the interest rate is set at the start and does not change for the life of the loan; and adjustable-rate (ARM) — the rate usually starts lower, then can go up or down at set intervals based on a market index, so the monthly payment can change too.

Loan term: 15 or 30 years

The most common fixed-rate mortgage terms in the US are 30 years and 15 years. A 15-year loan has a higher monthly payment but a lower total interest cost and is paid off sooner. A 30-year loan has a lower monthly payment but a higher total interest paid over the years.

Advertisement

Down payment and PMI

The down payment is the share of the price the buyer pays from their own funds. According to the CFPB, you usually need a down payment of at least 3 percent of the home price, but a buyer who puts down at least 20 percent saves the most. If less than 20 percent is put down on a conventional loan, private mortgage insurance (PMI) is generally required. Under the 1998 Homeowners Protection Act, PMI is automatically terminated once the balance reaches 78 percent of the home's original value, and the buyer can request cancellation at 80 percent.

FHA loans

Loans insured by the Federal Housing Administration (FHA, part of HUD) are aimed at buyers with a lower down payment or lower credit score, including many first-time buyers. Under FHA rules, a credit score of 580 or higher requires a down payment of at least 3.5 percent; a score of 500–579 requires at least 10 percent. Below 500, a loan is generally not available. Some lenders set higher requirements than the FHA floor.

The role of the credit score

The credit score is a figure from 300 to 850 in the FICO and VantageScore systems. A conventional mortgage usually requires a FICO score of around 620 or higher. Lenders also weigh income, employment, the debt-to-income ratio and the down payment. A higher score usually means access to a lower interest rate.

Debt-to-income ratio (DTI)

The debt-to-income ratio (DTI) is your monthly debt payments divided by your gross monthly income — a key measure lenders use. As the CFPB notes, different loan products and lenders have different DTI limits. A figure of around 43 percent is often cited as a common guideline (and can be higher for some programs); it is a general benchmark, not a fixed legal cap.

Getting pre-approved: pre-approval vs pre-qualification

Before house-hunting, most buyers get an estimate from a lender. As the CFPB explains, these terms are used inconsistently by lenders: a prequalification is usually based on unverified information you report, while a preapproval is based on verified information. Both state a potential loan amount, but neither is a guaranteed loan offer.

Closing costs and escrow

Beyond the down payment, the buyer also pays closing costs — according to the CFPB, usually 2–5 percent of the home price, covering fees such as appraisal, inspection and recording. Many mortgages set up an escrow account: part of the monthly payment is collected and used to pay property tax and homeowners insurance. Escrow is generally required on FHA and USDA loans.

Options for immigrants

Lawful permanent residents (green-card holders) can get a conventional mortgage on the same terms as citizens. Non-permanent residents on a valid work visa (for example H-1B, L-1) with appropriate status documents are also eligible. Under Fannie Mae rules, a conventional loan generally requires a valid Social Security number (SSN), and a conventional loan is not backed on an ITIN alone. Specialized mortgage products for ITIN holders (ITIN loans) do exist, but they are separate, non-mainstream products offered by a narrower set of lenders.