Your budget can affect everything from the neighborhoods where you look, to the size of the house, and even what type of financing you choose. We recommend that you consult with a reliable mortgage broker to help determine your financial limits.


Pre-approval and Pre-qualification
The best way to determine your budget is to have a lender pre-approve you for a loan. Also, a letter from your lender stating that you have been pre-approved for a loan is very important when making an offer on a home. Such a letter assures the seller that you will be actually be able to afford the home. 

How large a mortgage will you be able to get?
A general rule is that you usually can qualify for a mortgage loan of two to two and one-half times your household's income. For example, if your family has an income of $50,000 a year, you can usually qualify
for a mortgage of $100,000 to $150,000.

Lenders use many other factors to determine how large a mortgage they will give you. These two ratios
are very important.

• Debt-to-income ratio
  Many lenders believe that the amount of debt you are paying on each month 
  (car payment, student loan, credit card, etc,) shouldn't exceed more than 36
  percent of your gross monthly income.  

• Housing expense ratio
  It is generally difficult to obtain a loan if your monthly mortgage payment,
  including principal, interest, real estate taxes and homeowner's insurance, 
  will be more than 28 to 33 percent of your gross monthly income (before taxes). Suppose a home buying couple make $45,000 a year. The maximum amount of money available for a monthly mortgage payment at 28 percent of gross income would be $1050. The total amount the lender will allow for all debt payments each month should not exceed 36 percent, which comes to $1,350.
   

What factors are important to lenders?
Mortgage lenders are primarily interested in your ability to repay the mortgage loan.  Lenders will review your financial situation to determine how much money they’ll agree to lend. The factors include:

• Your gross monthly income.

• Your job security.

• Your credit history.

• The amount of your outstanding debts.

• The amount of money you have available for the down payment and closing costs.

• Your choice of mortgage (i.e. 30-year, FHA, etc.).

• Current interest rates.
   

Down payments make a difference
If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent 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. Most lenders require
  a "gift letter" stating that the gift doesn't have to be repaid, and may also require you to pay at least a portion of the down payment with your own cash.

• Loan Programs
  National, state and local governments have special loan programs designed to help first-time homebuyers. Loans may be available at reduced interest rates, or with little or no down payments.
  Your lender should be able to talk to you about these loan programs. These programs aren’t available to everyone, so don’t be disappointed if you don’t qualify.
  
  FHA Loans: The Federal Housing Administration insures residential mortgage loans made by private lenders. With FHA insurance, you can buy a home with as little as a 3 percent down payment. FHA mortgages currently have a maximum loan limit of $154,896.
  
  VA Loans: The Veteran's Administration allows qualified veterans to buy a house that costs up to $203,000 with no down payment. In addition, the qualification guidelines for VA loans are more flexible than those for either FHA or conventional loans. To determine whether you are eligible, check with the nearest VA regional office. 

• Loan Types
  Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for Conventional 30-year loans because the payments and interest rate remain constant throughout the length of the loan. Make certain you discuss the pros and cons of these loans with your lender before making a decision.

• Include Closing Costs into the Loan
  It is not uncommon to have your real estate agent write an offer in which the seller is asked to pay your closing costs. This doesn’t mean that the seller is giving you a gift. You’ll still be paying your own closing costs.
  
  Suppose your willing to offer $125,000 for a home and your closing costs are estimated to be $2000. Your agent can write the offer for $127,000 and ask the seller to pay $2000 toward your closing costs. The seller will still receive  $125,000 for his property and you will be financing an additional $2000 through your mortgage lender.