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Determining how much you can borrow

Do you break out in a cold sweat at the thought of sitting down with a lender to see how big a loan you can get? Do you tremble when you think about laying out all your financial dealings and credit problems in front of a loan officer you have just met?

Wouldn't it be nice if you could just sit down in the privacy of your own home and figure out how much you could borrow by yourself?

Well, you can. Although "prequalifying" yourself is no substitute for having a lender do it for you, it will at least give you a ballpark idea of how much home you can afford.

"I don't really know why, but some people just don't like talking with lenders until they absolutely have to," said Michael Graves, vice president of American Residential Mortgage Corp. in San Diego. "If you do a few simple calculations first, you can get a pretty good idea of how much you can borrow without having to visit a lender."

First, Graves said, you need to figure out how much you earn on an annual basis. Include your salary, as well as any bonuses or commissions you might get.

"Also, don't forget to include any alimony or child support you collect," added Gloria Shulman, a mortgage broker and president of Crestview Financial Group in Beverly Hills, Calif. "You can count it as income, which can help you get a bigger loan." Once you have calculated your annual earnings, divide the figure by 12 to get an average of how much you gross each month.

Here's where you need to know a little about "ratios." Every lender uses two ratios when calculating how much you can borrow. One is commonly called the "front-end" ratio, and the second is often called the "back-end" ratio.

The front-end ratio reflects the percentage of your gross income that will go toward housing-related expenses. As a general rule, the lender will allow you to devote as much as 28 percent of your earnings toward your "PITI" _ principal, interest, property taxes and insurance.

The back-end ratio reflects how much of your gross monthly pay would be eaten up by your housing payments and all your other installment debt _ auto and student loans, minimum payments on your credit cards and the like.

Generally, your back-end ratio can't top 36 percent of your monthly earnings. Therefore, if you earn an average of $3,000 a month, you will be allowed to spend as much as $840 a month ($3,000 x .28 = $840) on your housing as long as your overall monthly debt doesn't top $1,080 ($3,000 x .36 = $1,080).

Once you have estimated how much you can pay based on these ratios, you need two more pieces of information to get a ballpark estimate of how much money you can borrow.

First, you need to find out what kind of interest rates are being charged by lenders in your area. You can do this by calling up a few banks or savings and loans, or you can look on 2H of today's At Home section.

The final piece to the borrowing puzzle is a loan amortization book that shows how much it costs each month to pay back a loan based on various interest rate levels. You can purchase one for about $5 from most bookstores. Let's say you find that local lenders are charging 9{ percent on their 30-year, fixed rate loans. Since you make $3,000 a month, you have already determined that you can devote $840 toward your monthly housing expenses.

Open your loan amortization book to the table that shows how much you would have to pay each month to amortize _ in other words, "pay off" _ a 9{ percent loan. Running your finger down the "30-year" column, you will see that an $840 monthly payment will allow you to get a $100,000 loan.

WHAT TO BRING TO THE INTERVIEW

Last two years' W-2 forms.

Pay stubs for a month.

Names and addresses of employers for the past two years.

Bank statements for last three months.

Names, addresses, account numbers and balances of all savings and checking accounts.

Twelve months' canceled checks for rent/mortgage payments.

Account numbers, payment amount and balances for all charge cards and installment loans.

Social Security numbers.

Dates of birth.

Mailing addresses for the past two years.

Sales contract.

Plans and specifications for construction loan (if applicable).

Deed (if you own the lot).

Current leases, if you own rental property.

If self-employed, last two years' tax returns and all schedules.

If self-employed, current financial statement for business.

VA only: certificate of eligibility.

The business card of your real estate agent or builder.

Application fee.

Source: Security First Federal Savings and Loan, Tampa

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