- The Washington Times - Friday, January 7, 2011

Q. My wife and I have been renting an apartment for the five years since we graduated from college. We have been watching the real estate market and have decided 2011 is the year to buy our first home.

Can you give us a rule of thumb for how large a mortgage we can qualify for? Our combined salaries total $85,000. We have one car loan that costs us $280 per month, and our student loan payments total $180 per month. Our credit should be perfect, and we have about $40,000 in savings.

A. The first thing I tell all of my clients who are in the market to purchase a home is to forget about how much a bank is willing to lend. One should never base his decision on how much a lender is prepared to lend - that’s what created the mortgage meltdown. Instead, a homebuyer should ask himself what he is comfortable paying.

Everyone is different, and everyone’s spending habits are different. This means an appropriate loan amount can vary from individual to individual, even if they share the same income and debts.

Having said that, I first would ask you the amount of your monthly rent. I then would ask if you are comfortable paying that amount. The idea here is to establish a house payment that falls within the comfort range of the particular borrower. Once we have established that range, we can compare it to the acceptable standards in the lending industry to ensure that it is prudent.

Prudent underwriting guidelines say your total monthly obligations should not exceed 38 percent to 40 percent of your gross monthly income. This ratio can increase, depending upon your credit rating, down payment and other factors. Let’s use 40 percent as a debt-to-income ratio to illustrate.

Forty percent of your gross monthly income equals $2,833. This means your new house payment, plus other monthly obligations, including credit card payments and installment loans, should not exceed this number.

If we back out the monthly payments for your car and student loans, that leaves us with $2,373 for a house payment. Let’s back out an estimated $350 for taxes and insurance, and it leaves us with $2,023 available for a principal and interest (P&I) payment.

Using a 30-year fixed rate of 5 percent, a P&I payment of $2,023 will buy you a loan amount of about $380,000.

We now must look into funds for the down payment. A conventional loan would require a down payment of at least 5 percent. A loan insured by the Federal Housing Administration would require a down payment of at least 3.5 percent.

Tailoring the right mortgage program for you will require much more discussion than can be covered in this column. The bottom line is that you probably can qualify to purchase a home in excess of $400,000. That’s not the point, however.

A good loan officer will sit down with you and help you establish your objectives, which will include determining a down payment and loan range that’s affordable and appropriate within the desired price range of the new home.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.

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