Your new house - how much can you afford? 

It's important to find out how much you can afford to spend when buying a home. the best way is to get a pre-qualification letter from a mortgage lender, so you will know in advance of house hunting. Frequently, the first-time home buyer can get 

confused about all the costs such as how much their monthly mortgage payment will be, along with any cash they will need for a down payment plus the closing costs.

Getting a pre-qualification through a mortgage lender is a good idea for exactly that reason, even before looking for a home. A pre-qualification helps the buyer understand the amount a lender is willing to lend. Also, having a pre-qualification letter in hand can save a buyer time when house shopping. Getting a pre-qualification does not require the buyers to use that lender, and it is most often provided at no cost. However a fee may be assessed at the time the buyer applies for the loan.

Buyers should also note though that a pre-qualification is not the same as being pre-approved. Approval requires more paperwork and a process that consists of obtaining an actual letter of credit for a specific home purchase from a lending institution. A pre-approval may be useful in some situations, but is not required. Your real estate agent can help you decide which route to take.

Using a pre-qualification process instead is a great tool for buyers to have in hand as they make an offer. The pre-qualified buyers usually have an advantage when making an offer to buy, since the seller is aware that the buyer is pre-qualified from at least one lender who will make the loan work.

Also, since the pre-qualification is not a requirement to get a particular loan, it provides flexibility when it comes time to select the right mortgage, which can often be moths later. With changes in interest rates, this can be an important feature. 

A lender pre-qualifies a client more in order to determine whether the buyer can pay for a home, rather than focusing on the sale price of the home. Lenders will look at not just the buyer's income, but also check to see how much outstanding debt a buyer has, any other financial obligations they have and what the buyer's monthly income and expenses are.

As a rule of thumb, lenders will use a standard debt-to-income ratio, normally somewhere between .28 to 1 and .38 to 1, when calculating the size of a loan they will extend to a buyer. If a lender uses a .3 to 1 debt-to-income ratio, they are in effect stating that the mortgage payments the buyer will pay, including any outstanding debt plus the new debt that comes with buying the home, cannot exceed 30% of the buyer's gross monthly income.

One major factor a lender will look at when determining what the debt-to-income ratio should be for a buyer is how large the down payment is. If a buyer can put down a larger down payment, for example more than 15% or 20%, these buyers are considered a better loan risk because the buyer may be less likely to default when they have more equity invested in the home purchase. To make an approval more likely, it's better to put down as much as possible in a down payment toward the home purchase.

In very general terms, a pre-qualification will usually result in a buyer being given the green light to purchase a home that costs between 2-1/2 to 3 times their gross annual income. This guideline is only a rule of thumb, and every lender is slightly different, and it also does not consider the buyer's total financial situation. A lender's determination may also take into account a buyer's actual debts and current expenses, making the loan pre-qualification amount somewhat higher or lower.

No matter what price range the buyer is considering, getting a pre-qualification is a good idea.

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com