How much house can you afford?

By Rosemary Heins

From eNews, September 13, 2007

Buying a house is a big investment. If it's done right, it's better than paying rent because equity is built up in the house. But you need to be in a good financial position prior to the purchase. And you need to figure out how much money you can afford to spend on the house, too.

This is where a mortgage lender comes in. Mortgage lenders compare your ability to pay for your house to your monthly income. They don't like to see housing costs for principal and interest exceed 28 to 32 percent of your gross income. They also take into account other debts that you need to pay, such as car payments, credit cards, and student loans, and this debt should not exceed 8 to 11 percent of your income.

Lenders also look at the appraised value of the home you want to buy. A general rule is that you need to have 20 percent of the cost in cash for a down payment, but some lenders may allow much less.

If you are a first-time homebuyer, there are government programs to assist you with down payments. In Minnesota, these programs require that you take "Home Stretch" classes. You can find a class near you at the Home Ownership Center Web site or you can call 866-462-6466. (Classes are available throughout Minnesota.)

Know your rights

In 2006, Hennepin County saw more than 3,000 home foreclosures, up more than 80 percent from 2005 and nearly 350 percent from 10 years ago. But things will soon start looking brighter for Minnesotans. Thanks to a University of Minnesota alum and Law School professor, Minnesota has the best protection in the nation against residential mortgage fraud. To learn more, read "Victory for the consumer."

Rosemary Heins is a family resource management educator with University of Minnesota Extension.