How much can you afford?

Understanding how much you can afford is one of the most important rules of home buying. You budget will affect everything from the neighborhood, to the size of the house, an even what type of financing you choose.

Lenders will look at more than just your income to determine the size of the loan. You may find that there are some creative financing options that can help maximize your purchasing power.

Loan Prequalification vs. Preapproval

One way to determine your budget is to get prequalified for a loan. Prequalification is different from preapproval, because it is only an estimate of what you will be able to afford. Prespproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specific amount.

Factors That Are Important To Lenders

• Your gross monthly income
• Your credit history
• Amount of your outstanding debts
• Your savings - or the amount of money you have available for a down payment
• Your choice of mortgage
• Current interest rates

Two Importantant Ratios

• Debt to income ratio: Many lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit cards, etc) should not exceed more than 36 percent of your gross monthly income.
• Housing expense ratio: It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.

Down Payments

If you make a large down payment, lenders may be more lenient with their qualifying ratios.