Matching income with home-buying outgo

After several years standing outside the housing-market door because of high interest rates, many first-time home buyers are finding the door somewhat ajar. The problem is, some of the rules for getting into that first house have changed. Today, more work is needed to figure out how big a mortgage you can afford and, thus, the price range of houses you should be looking at. Lenders now have fairly clear rules for ``qualifying'' buyers, but there are other factors to consider.

``A lot of people have been waiting for rates to come down,'' says Robert Rocklien, senior vice-president in charge of loan production at Commonwealth Mortgage Company in Boston. And now that 30-year fixed mortgage rates are running from 101/2 to a little over 11 percent in most of the country, ``the volume is getting heavier,'' he says.

In the first half of last year, sales of existing homes amounted to about 3 million units, notes Glenn Crellin, a vice-president and economist at the National Association of Realtors. In the second half of the year, as rates began to slide, sales jumped to more than 3.5 million. Although many of these were not to first-time home buyers, they did account for some of the jump, Mr. Crellin says.

Since the last time interest rates were this close to 10 percent, lenders have imposed tighter debt-to-income requirements, which, along with more expensive houses, have made it a bit harder to buy that first home.

On the other hand, the growth of the ``secondary'' mortgage market, where lenders sell their mortgages to private investors or government-sponsored agencies like the Federal National Mortgage Association, or ``Fannie Mae,'' has brought some uniformity to the qualifying process. If lenders want to sell their mortgages to raise more money for home loans, they have to follow some fairly strict guidelines.

The heart of those guidelines was issued last year by Fannie Mae. The guidelines are based on two debt-to-income ratios. The first says home buyers should not be spending more than 28 percent of their gross monthly incomes on payments to loan principal, interest, property taxes, and homeowner insurance.

The second ratio is higher, but includes all loans. In this one, a homeowner should not be paying more than 36 percent of his or her (or their joint) income for principal, interest, taxes, and insurance, plus payments on all other debts, including car loans, charge card payments, other banks loans, or student loans.

If it's an adjustable-rate mortgage, the ratios are lower, to reflect the possibility of higher payments in the future. Instead of 28 and 36 percent, it's 25 and 33.

There are two ways to translate these guidelines into a formula that will help you decide if you can buy a house and, if so, how much you can spend.

First, let's assume you've found an $80,000 house and have saved up enough to make a 20 percent down payment. This leaves a $64,000 mortgage. With an 11 percent loan, the monthly payments for principal and interest would be $610. Now let's assume $125 a month for property taxes ($1,500 a year) and $40 a month ($480 a year) for homeowner insurance, for a total of $775 a month in housing payments.

If you have no other debts (car payments, college loans, outstanding credit card balances), you can simply add up your monthly income, multiply by 0.28, and see if the figure comes close to your monthly income. In this case, you should have a monthly income of about $2,800 to qualify for the loan.

Now, if you have aboout $300 a month in other loan payments, that's going to raise your total monthly debt burden to $1,075. You'll need a monthly income of about $3,250 to support this and the mortgage.

Looking at the problem from the income side, let's assume a couple have a combined monthly income of $3,000 and has no particular house in mind. If they have no other debts, multiply $3,000 by 0.28 and we see they shouldn't be paying more than $840 a month for housing-related costs. Subtract $125 for property taxes and $40 for insurance, and the principal and interest payments should be about $675 a month. With an 11 percent interest rate, this would mean a mortgage of about $70,000, or a house selling for around $87,500, assuming a 20 percent down payment.

Then there are the ``other factors'' we mentioned earlier. All the money you saved for a down payment can shrink when various fees and charges are subtracted. Figures from a bank in our area show an application fee of $150 to $200; a loan origination fee, or ``points,'' of 2 percent of the loan balance; a $100 appraisal fee; $25 for a credit report; $100 to $200 for an inspection; an attorney's fee based partly on the size of the loan; and mortgage insurance.

Homeowners also have other expenses that renters usually avoid. To start, there are costs for cosmetic things like paint and curtains. You may also need some new appliances, if these were not included.

Then you need some money available for repairs you used to call the landlord about: broken windows, a new water heater, stopped-up sinks, or heating problems.

A bank loan officer or a good real estate agent can help you run through all these numbers. There are, however, some questions they cannot ask that you should ask yourself. For instance, it is illegal to ask a childless couple about their plans to have children, even if they clearly need both incomes to meet house payments. But that doesn't mean you can't ask yourself how you would cope with a sudden decrease in income.

On the other hand, you can factor in an expected promotion or pay raise, if you don't quite meet the debt-to-income requirements today. Some lenders will qualify you if you can show that a raise, like a scheduled cost-of-living pay increase, is coming fairly soon.

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