A few fundamentals on financing a new house or condominium

Thinking of buying a house, condominium, or co-op apartment? All lenders use guidelines to establish the creditworthiness of prospective buyers. You can use these same guidelines to examine your own finances and get an idea of how much money you can afford to spend.

There are differences in both the financing and the out-of-pocket expenses associated with buying a house, condominium, or co-op apartment. But regardless of the type of housing you want to buy, lenders basically use two numbers to help them decide if they should approve a loan application or reject it.

The magic numbers are:

Ratio of housing expenses to income.

Ratio of total debt to income.

Lenders generally feel that your monthly housing expenses should not exceed 28 percent of your household's gross monthly income, according to George Alexander, director of product marketing for the Federal National Mortgage Association in Washington, D.C.

Your income can be from several sources, he points out, such as salaries and social-security payments, and it can come from all adults in the household. Housing expenses in this case are defined as only your mortgage payment (principal and interest), real estate and school taxes, and homeowners' insurance.

In the second ratio, total debt to income, debt is defined as monthly housing expenses, plus any debts you are obligated to pay over a period longer than 10 months. Included in the figure could be your car payments, college loans, and credit-card balances.

Lenders advise that this total should not exceed 36 percent of your gross monthly income.

These guidelines are just that -- guidelines. A lender would look at many other things to determine if you qualified for a loan, says Mr. Alexander. If you have shown a good payment history or the ability to manage your affairs well, that counts a lot, he explains.

In arriving at these ratios, lenders figure you will have enough money left over each month to live comfortably.

Living comfortably, of course, is an unqualified term. What is comfortable to some people will mean a totally different thing to others. And there are factors that could sharply increase your expenses. How many children do you have at home? Do you entertain frequently or not at all? Does the property require costly repairs? Will you have to buy more furniture or major appliances for the new house, condo, or co-op?

The mortgage is only one expense in buying a house. You also have to provide a large amount of cash up front for such things as the down payment and settlement (closing) costs. With some creativity on your part, however, the down payment may be negotiated or traded for some service of goods of value, thereby cutting your actual out-of-pocket cash needs.

The bigger your down payment, the smaller the loan, and consequently the smaller the monthly payment will be. Many people put down 10 percent of the cost of a house, but sometimes a lender may require more cash.

Assuming that a 10 percent down payment is sufficient, a house that costs $90,000 will require an up-front outlay of $9,000. The amount is probably acceptable for people buying their second or third house, provided they have sold their previous house, but it could be hard for many first-time buyers.

Settlement costs, which include such items as the loan-origination fee (usually 2 to 4 percent of the total amount), plus title insurance (if required) and transfer taxes, could boost the amount of cash you need up front from $9,000 to closer to $12,000 or more.

Although the cost of buying a house may seem high, there are major tax breaks to the homeowner, such as income-tax deductions for property taxes and interest on the mortgage loan.

For sound advice, check with a bank, savings-and-loan, credit union, mortgage company, and real estate professionals who can advise you on the availability of money, neighborhood trends, and expectations for future growth.

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