Can you afford the home that you want?

So, you have finally found the courage to get out of the rent trap you are in, and have decided you want to buy a home for you and your family. But then you ask yourself: Can I afford the home I want? How much can I afford?

Before you even start looking for a home, you have to determine the price of a home you can afford, or how much monthly mortgage payments you can afford. A reputable real estate agent can help you determine if you qualify for a loan to purchase your dream home, and what price range you can afford to pay. Based on this determination, your real estate agent can help you find the house you want at a price you can afford.

It's better to ask your real estate agent or loan agent to pre-qualify you, or better yet have you pre-approved by the underwriter. Pre-qualifying is an unofficial, initial estimate of the size of mortgage you can afford. By being pre-qualified, you would be spared the trouble of looking at houses that you'll find out later you cannot afford. Pre-approval means the underwriter has examined all your documents, including your pay stubs, tax returns, net worth statements, bank accounts, monthly budget worksheets, etc. and certifies that you are qualified for a specific loan amount. It will help speed up processing of your loan application when you finally decide on a home you want.

There are many factors that determine a homebuyer's eligibility for a home loan or mortgage. Among these are total household income, net worth (total assets minus liabilities), credit record, and the value and condition of the property to be purchased.

The first two determine the homebuyer's ability to pay the mortgage. The lender will analyze the amount, source and stability of your income, as well as the amount of all your outstanding debts.

The third determines your willingness to repay debts. If a credit report shows a number of late payments or non-payments, maxed-out cards (meaning cards that were used to the allowable limit or beyond the maximum limit), or too much use of credit, the lender may determine that you are a credit risk and may not be willing to lend you money.

The fourth determines whether the amount of loan that a lender is willing to grant can be covered by the price of the property that will serve as security or collateral for the loan. This involves the appraisal of the property and checking if it has clean title.

The ability to repay will determine the amount of loan one can get from the lender. The lender will be willing to grant a higher mortgage to a borrower who has a high income and low debt, than somebody who has low income and high debt or one with high income and high debt.

Lenders use two ratios to determine the monthly mortgage payment a borrower can afford or qualify for. Both ratios relate to expenses as a percentage of income.

The more commonly used ratio provides for a comparison of anticipated monthly housing expense in relation to gross monthly income. Housing expense includes principal, interest, insurance and taxes. Gross monthly income is the total monthly income before any deductions for income tax.

Lenders often will not allow housing expense to go beyond 28 to 33 percent of the borrower's monthly gross income. If you are willing to make a down payment of from 5 to 10 percent, you will most probably qualify at the 28-percent ratio.

For example, if you earn $2,500 a month and your wife, who will be your co-borrower, earns $1,500 a month, your gross monthly household income will be $4,000. If you make a 5-percent down payment on the property, you would qualify for a 28-percent ratio. Multiplying $4,000 by 0.28, you would qualify for a monthly mortgage payment of $1,120. Based on the current interest rate for a 30-year term of 6.75 percent, you would qualify for a home loan of around $160,000. So roughly, the $4,000 income should be able to buy you a $170,000 home, provided you have money for at least 5-percent down payment plus closing costs, and a sound credit history, and the interest rates remain at 6.5 percent.

The bigger your down payment, the higher mortgage you'll qualify for and, naturally, the bigger the house you can buy. Or, the bigger your down payment is, the lower your monthly mortgage payments will be.

The other ratio the lenders use to qualify borrowers for a loan involves the comparison of the borrower's total monthly debts to gross monthly income. Lenders usually do not allow this ratio to exceed 33 to 38 percent. For example, if your household gross income is $4,000 and you have monthly debt bills totaling $1,000, you deduct $1,000 from $4,000, you will get $3,000, then multiply this by 0.33, and you will get $990, the amount you can afford to pay in monthly mortgage payments. Based on current rates, that would qualify you for a little more than $150,000 mortgage.

These, of course, are just estimates. Many factors can affect the final determination of the mortgage you may qualify for. They are just intended to help you estimate how much you can afford and how much mortgage the bank may be willing to grant you.

Before applying for a home loan, it is advisable that you first clean your credit record by paying off as many loans as you can afford, and close all unnecessary credit card accounts.

If you are a first-time homebuyer, you will most probably make a slightly higher monthly mortgage payment than your current monthly rent, the difference depending on the price of the home you plan to purchase and the down payment you are willing to make.

If you are currently paying $800 monthly rent, this means you will have to adjust your lifestyle to afford paying the additional $200 to $300 in monthly payments. You may have to eat out less, rent videos instead of watching at AMC cinemas, reduce spending on clothes and cosmetics, etc. Security, comfort, and freedom from renting have its price. But it's all worth it, because you are making a long-term investment for you and your family.

Val G. Abelgas is a real estate professional with Century 21 Excellence, based in Whittier, CA. He may be reached via e-mail at valabelgas@aol.com