Qualifying for a Home Loan
When considering your mortgage, lenders look at a variety of factors, including your ability and willingness to repay the loan. Your ability to repay is verified by your current employment and total income. Your willingness to repay is closely related to how you’ve fulfilled previous financial commitments. This is why lenders place such an emphasis on your credit report.

It is important to remember that there are no rules carved in stone. Each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for the weak one.

Low Down Payment Mortgages
Even if you do not have a lot of money to use as a down payment, you still may be able to purchase a home. More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with as little as 5 percent down. With these loans, however, you may be required to carry Private Mortgage Insurance (PMI).

Qualification ratios are set by the lender that state your housing expense to income, and housing expense plus other debts to income, cannot exceed a specified number. Many lenders use a 28% housing expense to income and a 36% housing expense plus debts to income. Other ratios may be how much you put down on a home. It is important to remember that these ratios may vary from lender to lender and each application is handled on an individual basis.

Housing Expenses
Your monthly housing costs include the mortgage principle, interest, taxes and insurance often abbreviated PITI.

• Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income.

• For FHA loans, the ratio is 29% of gross monthly income.

Long-Term Debt
Any expenses that extend 11 months or more into the future, such as car loans, are termed long-term debt.

• For conventional loans, total monthly costs, including PITI and all other long-term debt, should equal no greater than 33% to 36% of your gross monthly income.

• For FHA the ratio is 41%.

Budgeting for Your Home
When budgeting to buy a home, it is important to allow enough money for additional expenses such as:

• Maintenance

• Utilities

• Homeowner’s insurance

• Property insurance

Want to Buy a Home? Use Our Tips to Get Your Finances Ready
It's never too early to start planning when you want to buy a home. These seven steps will put you on track.

1. Decide on your price range
Calculate how much you can afford. For example, if you can afford a maximum monthly payment of $1,000, you will be looking at a total loan amount of about $167,000 (assuming a 30-year fixed rate at 6 percent). And, remember, owners have different monthly bills than renters. Along with the mortgage payment, you’ll have to pay homeowner’s insurance, utilities and property tax. If you are realistic about your limits, you can focus on the right price range.

2. Look at your current budget
Have a look at your income and both long- and short-term expenses. Include any expected changes. Will that new job mean a rise in pay? Are you planning an expensive wedding or making a big purchase, such as a car? A careful plan will show where you have flexibility in your cash flow.

3. Open a savings account
Keep a separate home-savings account and don’t dip into it. This is the time to cut back on your expenses as much as you can in order to save for the down payment. So, curtail dining out and delay the purchase of new furniture. Save tax refunds, cash gifts or bonus checks. Give yourself a financial goal and a fixed time to reach it, say six months or a year, and then assess your situation.

4. Check out down-payment assistance
Although it’s nice to have a 20 percent down payment, it’s not necessary. Many lenders offer low down-payment products. Start investigating.

5. Get pre-approved for a mortgage
If you know how much you can borrow, you won’t have to make an offer conditional on financing -- and your offer will be more appealing to sellers. A lender will base the pre-approved figure on your income, credit and debts.

6. Don’t forget the extras
Aside from the down payment and the first mortgage payment, there are fees that may surprise a new homeowner. Closing costs can range anywhere from 2 to 6 percent of your mortgage amount. Plus, a home inspection may cost several hundred dollars. You may also have to hire a moving van or even stay in a hotel for a few days. Plan to save enough money to cover all of these expenses.

7. Your REALTOR® can help
Look for a REALTOR® with whom you are comfortable. After all, you will be spending quite a bit of time together. A REALTOR® will discuss the available homes in the neighborhood you are interested in and provide information on recent selling prices of comparable homes.

Documentation Checklist

• Legible sales contract signed by buyers and sellers

• Name and address of landlord(s) for the past two years. (if eligible)

• Proof of all income from the past 24 months. (tax returns, paystubs)

• Previous two years W-2 forms.

• Copy of most recent year-to-date pay stub for all applicants.

• Name, address, account number, monthly payment and current balance for:

• Installment loans (including student loans, auto loans, mortgage loans)

• Revolving charge accounts (home equity, credit cards)

• Proof of all deposit accounts, checking, savings, money market, IRA and brokerage accounts.

• Three months most recent statements for deposit accounts, stocks, bonds, etc.

• If you chose to include income from Child Support/Alimony, copies of court records or cancelled checks showing receipt of payments.

If you are self-employed or paid by commission:

• Previous two years Federal Income Tax Returns with all schedules.

• Year to date profit and loss statement and balance sheet.

• Corporate tax returns and all schedules.

If you have filed bankruptcy in the last seven years:

• A copy of petition and discharge, handwritten explanation of the reason for bankruptcy, evidence of excellent credit since the bankruptcy.

Debt to Income Ratio
When you shop for a mortgage or other loan, one of the key factors a lender takes into consideration before granting approval is your debt-to-income ratio. This is the ratio between how much you owe each month on personal debt and how much you earn. This ratio calculates the percentage of debt you are carrying in relation to how much money you are making and gives lenders a good indication of how much additional debt you’ll be able to handle.

The arithmetic
In order to make the calculation, add up your fixed monthly expenses such as your car payments, minimum credit card payments and any other regular debt obligations such as monthly child support or student loans (you don’t have to include bills for things such as groceries or utilities). Add your expected housing payments (your mortgage payments plus, for example, private mortgage insurance, homeowner’s insurance and property taxes) and divide the total by your gross monthly income.

Standard rule of thumb
A common rule when shopping for a mortgage is that your debt-to-income ratio should be no higher than 36 percent. Anything above this could mean you’ll be denied credit or charged a higher interest rate on your loan. Lenders also like the total of your housing expenses alone to not exceed 28 percent of your monthly gross income.

Exceptions to the rule
Some lenders will accept loans even if your ratio is above 40 percent, and there are certain mortgages that allow a higher percentage as well. Federal Housing Authority mortgages and Veterans Administration mortgages, for example, allow a debt-to-income ratio of up to 41 percent. With any loan, however, you need to be sure you are comfortable with the amount of debt you are accumulating. Keep in mind, the lower your debt-to-income ratio the better, so pay down as much debt as you can before starting the mortgage process.

Use the following worksheet to calculate your debt-to-income ratio:

Minimum monthly credit card payments*: _____________

+ Monthly car loan payments: _____________

+ Other monthly debt payments: _____________

+ Expected mortgage payments: _____________

= Total: _____________

Your debt-to-income ratio:

Total ÷ monthly gross income = _____________

*Your minimum credit card payment is not your total balance every month. It is your required minimum payment -- usually between two and three percent of the outstanding balance.