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HOW MUCH HOUSE CAN YOU AFFORD?

How much house can you afford to buy? Although financing your dream home may be costly, you may be able to afford more than you think.

Buying a home usually involves both a cash down payment and a mortgage for the balance of the purchase. Unless you know in advance the amount of down payment and the mortgage you'll need, you really don't know how much house you can afford. These three elements are crucial to the purchase of a home -- the down payment, closing costs and qualifying for a mortgage.

Down payment: The amount of the down payment you'll need depends on how the transaction is structured and the type of financing you obtain. Typically, conventional lenders will require a 20 percent down payment, although in some cases, loans with down payments of as little as 10 percent may be obtained. If a down payment of less than 20 percent is made, the buyer likely will have to pay private mortgage insurance, which guarantees that the lender will be repaid in case of default.

Single-family mortgages insured by the Federal Housing Administration (FHA) have more lenient down payment requirements than most conventional loans. In most cases, FHA financing requires down payments of less than 5 percent. Mortgages guaranteed by the Department of Veterans Affairs (DVA) require no down payment on loans up to $184,000.

Closing costs: Closing costs, paid at settlement, vary considerably. However, the most common costs including the following: discount points (one point equals one percent of the loan amount), title insurance, escrow fees, attorney fees, termite report, recording fees, appraisal fees, document preparation fees, notary fees and a loan underwriting fee.

Loan qualification: Determining how large a mortgage for which you qualify is based mainly on the interest rate offered and your income. The higher the interest rate, the higher the monthly payment. And, the higher the monthly payment, the more income you will need to qualify for the mortgage. For conventional financing, lenders generally limit the monthly payment to 28 percent of your gross monthly income, although exceptions can be made depending on individual circumstances.

A point to remember -- the monthly payment probably will be calculated to include taxes and insurance, along with the principal and interest on the mortgage.

Besides checking your income, the lender also will require a credit report, as well as a statement confirming your employment. Be prepared to show financial statements proving that you have the money to cover your down payment and closing costs.

Buying a home does require some financial resources. But, savvy buyers can make the maximum use of their money to get what they want. When you know how much you can afford, you're in a better position to negotiate with sellers. If you take the time to work through your budget, you will find out what you can pay without stretching yourself too thin or sacrificing important aspects of your lifestyle.

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