hen you are ready to begin looking at various houses to find
your dream home, you need to prepare all of the necessary
materials to present to the lender.  Your lender will tell you
exactly what you can afford so that you do not spend time
looking at "too much" home.  There are three key factors
that you will need to consider when determining how
much home you can afford.  These are  1.) the down
payment  2.) your ability to qualify for a mortgage
3.) the closing costs associated with your transaction.

Down Payment Requirements:
Most loans today require a down payment of between
3.5 - 5.0% depending on the type and terms of loan.
If you are able to come up with a 20% down payment,
you may be eligible to take advantage of special fast-track
programs and possibly eliminate mortgage insurance.
It is often thought that bigger is better when it comes to down payments.  In many cases, this may be true.  However, it does differ from case to case.  A bigger down payment means smaller monthly payments and lower interest expense for as long as you remain with the mortgage.  This can be an important factor for many people.  But, if you are able to put your available funds to work for you at a rate above that of the interest on the mortgage, then you will be dollars ahead with a smaller down payment.  Also, a smaller down payment may allow you to keep your extra cash liquid and available should an emergency arise.

Qualifying for the Mortgage:
Most lenders require that your monthly payment range between 25 - 30% of your gross monthly income.  Your mortgage payment to the lender includes four items...the PITI.  The items are discussed in detail on the page entitled "Predicting Your Monthly Payment (The PITI)."  Remember, when you buy a home all of the interest you pay is tax deductible, so you will qualify for a major tax advantage that will effectively increase your take-home pay.  Your total monthly PITI and all debts (from installment payments you make to revolving charge accounts) should range between 33 - 38% of your gross monthly payment.  This is a general rule of thumb and there are other key factors determine your eligibility for a home loan.  These factors are:
    INCOME: History of employment, stability of income, potential for future earning, education, vocational training and background, and dany secondary income such as bonuses, commissions, child support, etc.
    CREDIT REPORT: History of debt repayment, total outstanding debt, and total available credit.  If you have concerns about your credit report, consider contacting one of the major credit bureaus for a copy of your file: Transunion, Experian, and Equifax.
    ASSETS: Cash on hand, other liquid assets such as savings, checking, CDs, stocks, etc.
    PROPERTY: The home you are buying must be appraised to determine that it has adequate value and is marketable to ensure it will secure the loan.

Closing Costs:
Don't forget to think ahead carefully.  In additon to the down payment on your dream home, you will be required to pay fees for loan processing and other closing costs.  These fees must be paid in full in cash at the time of the final settlement, unless you are able to include these in your financing.  Typically, total closing costs will range between 2 - 5% of your mortage loan.  (Check out our Closing Costs article for more info.)

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