How Much House Can I Afford? by Michael Licamele

If you are looking to buy your first home, the most important step you can take is to contact a mortgage loan officer to help you find out how much you can afford. Use our mortgage locator service by clicking purchase and completing the on-line application. A loan officer who specializes in helping first time home buyers will contact you immediately. We hav elso found Lending Tree and Get Smar to be helpful:

Strategies for Maximizing Your Borrowing Power

The first step in the home buying process is to find out how much of a home you can afford by getting pre-qualified. A pre-qualification is a simple calculation of your buying power based on your income, debts and available assets. You can get a rough idea yourself using our on-line Pre-Qualification Calculator at:

Pre-qualifying is not the same as obtaining a pre-approval. You can obtain a pre-approval by submitting a loan application. If you are definitely seeking to purchase a home in the next six months, we recommend obtaining a pre-approval after getting pre-qualified for three reasons:

1. You can discover and resolve any problems with your loan application early.

2. You will be in a better bargaining position when bidding on a home because the sellers will know that you already have your financing in place.

3. You can probably qualify for a much higher loan with our pre-approval because we have many flexible programs that let you borrow what you need right now.

How Lenders Calculate How Much House You Can Afford

The total of your mortgage plus your down payment equals the total home price that you can afford. Many first time buyers make little or no down payment because their funds are limited and because lenders offer numerous mortgage programs that do not require any down payment (100% financing).

Lenders use two qualifying guidelines to determine what size mortgage you are eligible for. The first guideline looks at just your total monthly housing payment. This payment includes your mortgage payment, property taxes, homeowners insurance and condominium/cooperative fees (if applicable). In the past, most mortgage lenders would require that your income should total no more than 28% of your monthly gross (before tax) income. Today, there are loan programs that permit borrowers to borrow anywhere from 28% to 50% of their gross monthly income.

The second guideline looks at your total monthly debt payments including both your housing payment and all other debt payments such as car loans, student loans and credit cards. Lenders look at the minimum monthly payment for credit cards plus the actual payment for installment loans. In the past, most mortgage lenders would require that your income should total no more than 36% of your monthly gross income. Today, there are loan programs that permit borrowers to have total monthly housing and debt payments anywhere from 28% to 50% of their gross monthly income as well.

Using these guidelines, you can see that having large monthly debt payments could affect how much of a mortgage you can qualify for. For this reason, it is recommended that you postpone, if you can, any large purchases that will be financed with large debt payments. One helpful note: any installment debt with less than 10 payments remaining is not counted by lenders as part of your monthly payments.

In the past, lenders were usually not willing to lend as much as borrowers were willing to pay for their monthly payment. Today, the opposite is true. You will most likely find that your lender will tell you that you can qualify for a payment that is much higher than you would be comfortable paying.

One item many home buyers forget about when calculating monthly payments is maintenance and repair expenses. While these expenses are not calculated by lenders in determining how much house you can afford, there are definitely more expenses associated with home ownership than with renting. Be prepared to spend money to protect your asset.

Strategies to Maximize Your Home Buying Power

Most home buyers get pre-approved for a 30 year fixed rate loan which up until a few years ago had been the most popular type of loan. If you find after getting pre-qualified that you do not qualify for as much as you need or would like, there are several strategies for increasing your home buying power. These include:

1. Selecting a mortgage loan that has a lower payment. Today, borrowers can choose from a number of loan programs offering lower starting payments and rates. Choosing an interest-only mortgage instead of a fully amortizing loan increases buying power. Alternatively, borrowers can choose from 40 and 50 year fixed rate loans, adjustable rate loans, graduated payment loans and numerous other options.

2. Select a loan program with higher qualifying debt-to-income ratios. Ask a mortgage specialist about these types of loans.

3. Increase your income tax allowances. While this does not increase how much the lender will allow you to borrower, it will help with your monthly cash flow if you feel that your new payment is a little steeper than anticipated. In nearly every case, home buyers will be paying more to own a home than to rent. One way to soften the blow from this increase would be to increase the number of allowances taken when calculating income tax deductions. Instead of getting a refund check at the end of the year, you can utilize those funds on a monthly basis.

Michael Licamele is the Editor of MortgageAlmanac.com and President of Residential Finance Network at rfnc.com.