How to know how much home you can afford

Thumbs down and shrugs punctuated the first year and a half of Rachel and Thomas Carter's home search. What turned that into a home purchase in Bellingham this past summer: confidence.

"We finally felt we had the down payment we needed for a house and that if we found one we liked, we'd buy it," Rachel Carter says.

Picking a home you can really afford often has less to do with a certain house than with understanding your ability to pay for it.

Step No.1 is figuring out how much you can afford. Numerous homebuyer calculators online will help you divide your monthly debt - such as car, credit card and student-loan payments - by your gross income. How much do you have left over? Just enough to make rent? Or enough for a cash cushion?

One way to gauge this is to receive a prequalification, preapproval or both.

A prequalification, or prequal, is an estimate of what you can afford. A preapproval, or a bank's statement that you could qualify for a loan at a certain amount, takes into account your credit standing. It's not a commitment, but it's far stronger than a prequal - and often necessary for a purchase.

With today's tight lending guidelines, strong credit and a credit score in the upper 600s often are necessary to get in the door. If you're not there, help is available - from seminars detailing smart credit card practices to credit-restoration services, at a fee.

"But don't let bad credit stop you from talking to lenders," says Mike Kent, broker at Windermere Real Estate. "Find out how quickly you can get it corrected. People can get back on their feet creditwise in a shorter time frame than in the past."

Homes themselves present challenges, too. Hidden expenses can pop up in seemingly perfect properties. Before signing the dotted line, be sure to push for an inspection and check out the structure, electrical systems, property lines and more. In addition to your down payment, there also are closing costs and insurance to pay.

Also remember that even though short sales and bank-owned properties come at a discount, repair costs for these oft-vacant homes could more than offset savings. And their closing times could be measured in months, not days.

Negotiating and shopping doesn't end after you've found the right home, either. Recent rule changes have aimed to make it easier for homebuyers to find the right mortgage - and mortgage professional.

Since Jan. 1, mortgage originators must provide a new version of the good-faith estimate (GFE) - a gauge of your loans rates and fees, which originators must provide you after your loan application - that includes a "shopping chart" to help you compare different banks' GFEs.

In addition, the new National Mortgage Licensing System is designed to make mortgage-licensing standards uniform across all states - and make information easier for consumers to find. Although not all states have joined the system yet, potential buyers can search to find which mortgage originators are licensed in Washington state - in addition to their employment history, contact information and even name changes.

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