However, keep in mind that lenders will look at more than just your income to determine how much home you can afford. Likewise, you may find that there are also some creative financing options that can help boost your purchasing power.

Pre-Qualification vs. Pre-Approval

One of the best ways to determine your purchasing power is to have your real estate agent or a lender pre-qualify you for a loan. Pre-qualification is different from pre-approval. Pre-qualification is only an estimate of what you’ll be able to afford, based on your current income and outstanding debts.. Pre-approval is a more formal process in which a lender further examines your finances and agrees in advance to loan you a specified amount of money to purchase a home. It is most advantageous for you as a buyer to obtain pre-approval (see Additional Info – Benefits of Mortgage Pre-Approval).

What factors are important to lenders?

Lenders use several criteria to determine how much money they will lend you. Included are, your gross monthly income, your credit history, the amount of your outstanding debts, your savings (or the amount of money you have available for a down payment and closing costs), your choice of mortgage (the particular type of loan that best suits your needs), and current interest rates.

Two Important Ratios

Lenders also use ratios to determine your qualification level. Two important ratios are the debt-to-income ratio and the housing expense ratio. Each are based on the following:

· Debt-To-Income Ratio This ratio is determined by comparing your total monthly obligations (outstanding debt; e.g., car payment, student loan, credit card, etc.) with your gross monthly income. Most lenders use a ratio of 36% as a rule of thumb; i.e., your monthly obligations should not exceed more than 36% of your gross monthly income. FHA loans are slightly more lenient. And many lenders will also push the ratio a little higher for borrowers with exceptionally high credit scores.

· Housing Expense Ratio This ratio is determined by comparing your monthly housing cost (mortgage) with your gross monthly income. Most lenders us a ratio of between 28% to 33%; i.e., your monthly housing costs should not exceed more than 33% of your gross monthly income. Again, FHA loans are slightly more lenient, and some lenders will push the ratio higher for borrowers with exceptionally high credit scores.

Down Payments Make A Difference

If you are able to make a large down payment, a lender may be more lenient with the qualifying ratios. For example, a person with a 20% down payment may be qualified with the 33% housing expense ratio, while someone with a 5% down payment may be held to the stricter 28% ratio.

Other Ways To Improve Your Purchasing Power

· Gifts Many lenders will allow you to use gift funds for the down payment and closing costs; e.g., a gift from your parents, or other family member, etc. However, most lenders will require a “gift letter” stating that the gift does not have to be repaid (they don’t want you taking on additional debts), and some loan programs may also require you to pay a portion of the down payment from your own funds.

· Negotiating Closing Costs Some sellers may be willing to pay a portion (or all) of your closing costs, depending on the price you offer them for their home (for example, if you offer near or at their full asking price). However, you have to make sure that you do not overpay for the home, because if the home does not appraise (nearly all lenders require that the home be appraised to determine its market value) for at least the purchase price, it may prevent you from purchasing the home. If you choose to take this approach, give us a call. We can assist you with this process and make sure you do not overpay for your home.

· Loan Programs Many local governments offer special loan programs or incentives to help first-time homebuyers purchase a home. Loans may be available at reduced rates, or with little or no down payment. Check with your local housing authority or ask us.

· Loan Types There are a wide range of loan products available on the market today. Adjustable rate mortgages (known as ARMs; see Additional Info – All About Adjustable Rate Mortgages) may offer a lower interest rate in the beginning to help increase your purchasing power. Another option is a 30 year mortgage, which carries a lower monthly payment than a 15 year mortgage, thereby allowing you to qualify for more home. There are significant differences between loan types and lenders, so be sure to do your homework before committing to a specific mortgage.

I would be happy to discuss financing options with you. I can offer you a preliminary pre-qualification, provide you with an estimated monthly payment and let you know approximately what your closing costs will be. Click Here to contact ME and I’ll be happy to assist you.