Before you get starry-eyed over the 3,500-square-foot model homes with waterfall pools and bathrooms the size of basketball courts, sit down with a calculator and face some facts. How much house can you afford?
Let's take this in three easy steps: (1) how much a lender will allow you to spend on your housing costs, (2) how much of that amount you'll need to set aside for property taxes and insurance and (3) how much you'll be able to borrow.
One of the terms you will hear in real-estate circles is the "28/36 ratio." Most lenders will allow you to spend no more than 28 percent of your gross income on housing costs.
That figure is often referred to as the "front-end ratio."
In addition, the sum of all your payments _ mortgage, credit-card minimum payments, auto loan, student loan, whatever _ should not exceed 36 percent of your gross income.
Lenders call this the "back-end ratio."
So, for example, if you earn an average of $3,000 a month, you can spend as much as $840 a month ($3,000 x .28 = $840) on your housing as long as your overall monthly payments don't top $1,080 ($3,000 x .36 = $1,080).
Out of that $840 a month you can spend on housing, you're going to have to set aside money to pay your property taxes and homeowner's insurance.
The real estate agent should be able to tell you the annual taxes on a particular house you're interested in, or you can call your county tax assessor's office with the address or current owner's name and determine the taxes.
For the sake of this example, let's say that taxes are $1,200 a year, or $100 a month, which would be about average for a home costing $75,000-$100,000, said Cheryll Leopold, assistant vice president at SouthTrust Bank.
A general guideline is that taxes are 1 percent of the sale price, she said.
You also need to factor in about $25 a month for homeowner's insurance.
So from the $840 a lender will let you spend on housing, you need to subtract $100 for taxes and $25 for insurance.
That brings you down to $715 you can spend on the actual mortgage payment _ principal and interest.
(You'll hear all this talked about in mortgage circles as "PITI" _ principal, interest, taxes and insurance.)
How much you
To find out how much you can borrow, you first need to know what lenders are charging on loans these days.
You can call up a few lenders, or you can look at the charts on Page 2H of today's At Home section. Let's say lenders are charging 7.5 percent on a 30-year, fixed-rate loan.
Now you'll need a mortgage amortization book, which shows how much it costs per month to repay a loan.
You can get one for about $6 at a bookstore or you can use a software program that shows amortizations or look at the chart accompanying this story.
You want to know how much you could borrow at 7.5 percent for 30 years, given your monthly budget of $715.
Look down the column headed "30 years" and you will see that the repayment cost is $6.99 per $1,000. Divide $715 by $6.99, and you'll see that this monthly payment would allow you to get a loan of about $102,000.
Or run your finger down the "30-year" column until you find a figure close to your monthly budget.
A $100,000 loan costs $699.21 monthly to repay, a $105,000 loan costs $734.18, and you fall somewhere in between.
Any lender should be happy to pre-qualify you, Leopold said.
If you want to go the full route of qualifying, including ordering a credit report, the process can take a couple of weeks, but if you simply want to sit down with a loan officer and walk through the basics, "I can do a rough in a matter of minutes," she said.
She suggested calling a lender to make an appointment, which should last about 30 minutes. Lenders like to do this because it starts a rela-tionship with a potential borrower and "keeps them from wandering" to other lenders.
Borrowers like it because they have a chance to talk to a loan officer and may feel on more solid footing when shopping for a house.
(See the story on applying for a mortgage for a list of the documents you'll need to bring.)
Remember that "pre-qualify" doesn't mean "approve."
Final approval for a specific mortgage amount comes only when you have a sales contract for a specific house and the lender has done a thorough examination of your financial situation.
Your credit report
You may want to get your financial house in order by taking a look at your credit report before you talk to a lender.
See the box for addresses of three major credit reporting companies.
They usually charge between $8 and $16 for their services.
If your credit report has any blemishes that you feel are unwarranted, contact the creditor immediately and try to clear up the problem. Receipts and canceled checks can serve as proof.
Assuming you resolve the matter in your favor, both you and the creditor should send a letter to the various credit reporting agencies explaining that the dispute has been satisfactorily resolved.
Even if you can't resolve the problem, send a letter to the reporting agencies to explain your side of the story.
This will show your lender that the matter is being disputed and that you're making efforts to clear up the issue.
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