What Do You Need to Buy a House?

When buying a new home the “conventional” way, you apply for a 30-year fixed-rate mortgage and make a big down payment – but you must be able to afford it. Because that conventional approach presents high hurdles for many people, new alternatives are emerging that might help you buy the house you want without needing all that cash right away.  

Startup companies are using technology and innovative business models that put a new spin on concepts like rent-to-own and all-cash offers. Many of the companies are catering to younger millennials, whose homeownership rate is relatively low – 38.5% in the second quarter of 2023 for Americans under 35 years old, according to the U.S. Census Bureau.¹ And they’re focusing on helping you avoid that big down payment, which experts see as one of the top financial obstacles to homeownership.^2,3

This article lays out what you need to buy a house “the old-fashioned way” versus the new alternatives emerging in many U.S. cities.

What you usually need to buy a house is 20% of the property’s price. This is the down payment most banks require for a conventional mortgage. According to a House Price Index (HPI) Quarterly Report released by the Federal Housing Finance Agency (FHFA) in August 2023, the average single-family home in America goes for roughly $400,000 in mid-2023.⁴ Tthat means you’d have to come up with at least $80,000 – plus closing costs that usually amount to between 2% and 5% of the selling price.^5,6 Then you’d typically have to make monthly mortgage payments on the rest, at an interest rate of around 7% at this writing.^7,8

Banks’ requirements don’t stop there. To get a conventional loan, you’ll usually need a credit score of at least 620, a solid credit history, proof of reliable income, a debt-to-income ratio of around 40% or lower, and more.^{9,10,11,12,13}

If you can’t come up with a 20% down payment, the bank will probably ask you to buy private mortgage insurance (PMI) to cover its risk. In that case, you’d have to pay a mortgage insurance bill every month on top of your mortgage payment. For more, read “How Much of a Down Payment Do You Need to Buy a House?”  

There’s another catch, though: Whoever is selling you a house usually prefers that you have an even bigger down payment than the banks require – and an all-cash offer is the “gold standard” in any situation where multiple potential buyers are bidding on a property. The theory is that the more money you offer to put down, the less chance there is of the bank denying your mortgage application. No homeowner wants to have to put their house back on the market after a buyer’s mortgage has fallen through.  

These are just some of the typical hurdles you need to overcome to buy a house the conventional way – hurdles that drove entrepreneurs to launch companies offering unconventional alternatives.