Consumers shopping for mortgage loans must demonstrate to local lenders their ability to make the payments each month. Lenders examine your credit record and the extent to which you are already in debt. They also consider your employment record. You will have a better chance of qualifying if you have stayed in the same job with a gradually rising income than if you have frequently changed jobs and remained at the same income.

Down payments and expected expenses

Lenders ask for down payments so that, if you default on your loan, the home can be sold and the losses from the transaction can be recovered from the proceeds of the sale. If you currently own a home, you can usually make the down payment on a new unit with the equity you realize from the sale of your old one. Equity is the difference between the price you would receive if you sold your current home and the amount you still owe on the mortgage. For example, if you owe $50,000 on your home but could sell it for $70,000, your equity is $20,000. Buyers entering the market for the first time usually must rely on savings or assistance from relatives to accumulate a down payment. Besides the down payment, you must also set aside money for other expenses, such as settlement costs, moving, repairs, landscaping and furnishings. These costs can vary considerably depending upon your circumstances. Use the worksheet below to estimate your expenses and the amount you will have available for a down payment.

Monthly mortgage payment

After you determine how much down payment you can afford, try to estimate how large a mortgage payment you can manage each month. Your monthly mortgage payment will be determined by the interest rate and amount of your loan. And the amount of your loan, plus the size of your down payment, will determine the price of the house you can buy. To estimate how much you can afford to pay for a new home, determine the average monthly income of all the members of your household and then deduct all non-housing expenses. If you are unsure how to estimate non-housing expenses, save and identify all sales receipts for a month or two. From the receipts, your checkbook and your credit card statement, you should be able to make a reasonable estimate. You must also compute recurring housing expenses, such as insurance, property tax, utilities, maintenance and repairs. Your lender will consider these expenses when evaluating your loan application. The worksheet below should help you calculate how much of a mortgage you can afford.

How much can you spend for housing each month?

If total 3 is greater than total 4, you should be able to afford the house. If total 3 is less than total 4, you may have difficulty meeting your housing expenses each month.