Buying a home: money matters

Paying a mortgage is a big step for any homeowner and many things need to be taken into consideration before "signing your life away."  The following guidelines will walk you through that process with ease.

How much of a mortgage can you take on? There are several formulas that will help you know what you can afford. Lenders often calculate that a mortgage should be no more than 1 1⁄2 to three times your annual income. Current interest rates help determine whether the multiplier is at the high or low end of the range. Some set the multiplier between two and 2 1⁄2 times your annual take-home pay (gross pay minus taxes). Lenders look at other numbers as well. Your monthly payments for credit-card purchases, car loans and other long-term debts will be considered. The size of your down payment will make a difference, too, as will the lender's perception of the stability of your income.Another common formula states that a family's monthly housing expenses — including mortgage, insurance, real estate taxes and sometimes maintenance and utilities — should be no more than 28 to 33 percent of gross monthly income. Again, this amount depends on other long-term debts as well as the down payment.

To get a clearer estimate of how much a lender will loan you, meet with one and ask for a prequalification. There's no obligation involved, and it helps you get a realistic picture of what you can afford before you start house-hunting. However, prequalification does not guarantee that you will get that loan when you bid on a house later on.  Pre-approval is a surer bet.

For pre-approval, you must make a formal loan application to a lender, who will check and formally verify your information. If all goes well, you will end up with an approval for a loan (subject to a satisfactory property appraisal and title search). This is an advantage if you are competing with someone else for the same property.

In any event, don't forget to set aside money for closing costs — the taxes and fees you have to pay in cash when the property changes hands — as well as moving expenses. Before you start your search, learn about the art of negotiation. Talk with people who work in fields where negotiations are common and read up on real estate transactions. You'll be glad later, when decisions must be made quickly. If you are using a real estate agent, here's where you'll start getting to know each other really well. Don't feel rushed into making an offer. Plan to look at several homes in your price range so that you can develop a broad understanding of what you can get for your money in the area.

Ask your agent to give you written comparatives — documents that describe recent sales of similar homes nearby. These "comps" will show both asking and selling prices and will provide a brief outline of the features of each home. Look over several months' worth so that you can get a feel for trends in the market.