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Ask Dr. Don

Can I afford my dream home?

Dear Dr. Don,
I have been searching for a house for the past three years. I finally found one, but the question is, can I afford it?

The house costs $146,000, and I only have $24,000 in savings, owe $10,000 in student loans and make $31,000 a year. I know I can afford the payments, but where can I look for someone to approve me for the home loan?

Do you think I will need a co-signer? I just don't know where to go. I don't want to hurt my credit history by getting pre-approvals only to be turned down for credit because of these credit inquiries.
Mark Mansion

Dear Mark,
Congratulations on finding a home. Now let's work on making sure you can afford it.

Take some of the guesswork out of this process. Lenders typically require that your mortgage payment, property insurance and property taxes not exceed 28 percent of your income, and that housing costs combined with other debt doesn't exceed 36 percent of your income.

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Use Bankrate's "How much home can I afford?" calculator to see if your dream home is within your grasp.

I estimated a few things about your monthly budget, like your student loan payment, homeowners insurance and property taxes, and entered it along with your monthly income into Bankrate's home affordability calculator. Using your actual monthly income and expenses will give you a more accurate picture, but it's doubtful that you're shopping in a price range that you can afford with a conventional mortgage loan.

Getting a family member or friend to co-sign your mortgage will improve your chances to qualify for conventional financing on this home, but I can't recommend it. The reason that you don't qualify on your own is that too much of your monthly income would be going to the house and house related expenses.

You may be willing to allocate more of your monthly income to housing costs, but it increases the odds that the co-signer will be called on at some point to make mortgage payments or see his credit rating ruined. That's not something that you want to happen to a family member or friend.

As the Federal Trade Commission guide Co-signing a Loan states, "When you're asked to co-sign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a co-signer."

What's the answer to finding a loan for your dream home? You need to find and qualify for unconventional financing.

For example, if you're a first-time home buyer you may be able to qualify for a mortgage loan program designed especially to meet your needs. Check with your state or local housing authority to see what programs are available in your region.

Another approach is to use Federal Housing Administration financing. While the FHA standards for debt as a percentage of income aren't that much different than conventional financing at 29 percent/41 percent vs. 28 percent/36 percent, FHA lenders have some flexibility when it comes to these standards when the homeowner is making a large down payment.

Your savings will allow you to make a larger down payment than the typical FHA borrower. Go to the FHA library to find out more about FHA loan programs.

The lender, not the government, determines FHA rates, so you still need to talk to several FHA lenders. If you comparison-shop for FHA mortgage loans within a short period (two to four weeks) then the loan inquiries won't hurt your credit score. That's because it's evident that you're shopping lenders.

It would be unusual for someone to buy several homes in a month, so several mortgage applications doesn't raise a red flag. Applying for mortgages now, then backing away and going through the process again in a month or two can hurt your credit score.

-- Posted: May 23, 2002

Read more Dr. Don columns here
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See Also
What's your mortgage grade?
10 do's and don'ts for getting a great mortgage
Other ways to save for a down payment
More Dr. Don stories

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