ASK KIM
Debts and Down Payment Will Determine Mortgage Size
by Kimberly Lankford

I'd like to buy a new home in a few years but am wondering what goal I should shoot for. I currently earn $50,000 per year. How much home can I afford?

Instead of comparing the cost of the home to your annual income, it's more important to consider how much you've already saved for a down payment, what kind of borrowing terms you can get and how much home equity you currently have.

For example, a first-time homebuyer who has saved $10,000 for a down payment can't afford nearly as much as someone who has $80,000 in profit from the sale of their first home to put down -- even if they both earn $50,000 per year.

All of these factors will affect your monthly payment, which is what lenders care about the most.

"Lenders do not like the borrower's monthly mortgage obligation (principal, interest, taxes and homeowners insurance) to exceed 30% of the borrower's monthly gross income," says Pete Bonnikson, vice-president of mortgage lending for E-Loan. "Total monthly debt service, including the mortgage piece, should not exceed 40% to 45% of your monthly gross income." Others limit it to about 36% of your gross pay.

If you're serious about buying soon, shop for the lowest rates, and when you find a lender you like, get pre-approved. The lender will tell you exactly how much it would be willing to loan you, or you could calculate your own estimate based on your financial situation and the size of your down payment. How generous the lender is with its terms and totals will depend on your credit record and whether the lender is actively seeking business (when they'll often relax their standards a bit).

But just because lenders will give you that much money doesn't mean it's always a good idea to take it. Lenders are looking primarily at your other loans, but you also have to consider other expenses that affect your cash flow.

For more information about buying a home, see the Home Buyer's Survival Kit