Rule of thumb:  You can afford a home that costs about 2 1/2 times your yearly income.
Some other factors that will help you determine how much you can afford:

• How much money do you need for other bills?
  Such as utilities, doctors, groceries, car payments, insurance etc.
• How much do you have for a down payment?
  The typical minimum down payment is 3% of the toal loan amount.   Some special financing programs have lower down payment requirements.   Down payments can also be from funds given to you by family or friends.
• How much will you need for closing costs and other payments?
  Be prepared to get our your checkbook.  There are several costs - along with the down payment - that will arise, such as earnest money, inspection and appraisal fees and insurance binders.

Qualtifying for a loan
Do not confuse loan qualification with loan approval.  Even before you begin looking for a home, meet with a lender to determine how much you qualify for.  Keep in mind that pre-qualifying with a lender does not bind you to that lender.  Do not sign any paperwork that would obligate you to a lender at this point.

Loan qualification
Estimate Your Maximum Home Payment

Gross Monthly income  _______________
Multiply by .28 for a conventional loan  ____________
or .29 for an FHA loan.  ________________
The number you come up with is your maximum monthly home payment.

Estimate Your Maximum Long-Term Debt Payment Allowed by a Lender

Gross Monthly Income:  ________________
Multiply by .36 for a conventional loan  __________
or .41 for an FHA loan.  _________________
This is the maximym total monthly debt payment a lender will allow, including housing.

Saving for Your Down Payment

• Don't take on any new debt.  Meaning, don't go out and purchase a new car if you're planning to buy a house.  Begin saving money as soon as possible.
• If possible, ask a family member for a gift of money.
  

Earnest Money:
This is money that is given to an agent once an offer is made on the property.  The amount can range from $1,000 to $5,000.  The earnest money is money that, if the offer is accepted, goes toward the down payment.

Homeowner's Insurance:
Once you find an insurer, you will need to pay the premium.  Once you pay this, you will receive a binder from your insurance agent, which you will need to bring to closing.  The cost depends on the policy you purchase.  It can vary from $500 to $2,500.

Inspection Fee:
Once you've made an offer on a home, you will need to have a property inspection.  Depending on how in-depth of an inspection you need (if you test for radon, have a well or septic inspection, etc.), you could pay from $200 to over $1,000.

Underwriting Fee:
Most lenders charge an underwriting fee to process your loan application.  This typically is around $250 and is paid at closing.

Origination Fee or Commitment:
This is a fee lenders charge for extending a loan above and beyond the interest they charge.  If you are considered a credit risk, you may be charged more.  The cost is usually 1% of the loan value and is paid at closing.

Appraisal Fee:
This typically costs between $250 and $350.

Plot Drawing/Survey:
Some lenders may require a drawing of the home's location, the lot lines, as well as any easements and rights-of-ways.  Plat drawings are less expensive, and less accurate.  Expect to pay $50 to $60 for a plat drawing.  For a more accurate description, you should have the property surveyed.  This could cost $300 to $700.

Mortgage Insurance, Private Mortgage Insurance (PMI):
Thi is the insurance required on some conventional loans.  For a $100,000 loan, the amount can range from $500 to $1,000 annually.  The larger the loan, the larger the insurance premium.

Mortgage Insurance Premium (MIP):
This is the insurance required for an FHA loan.  It is typically 2 or 2 1/4% of the loan, plus 1/2% annually for a certain number of years.   Keep in mind, you will never need both PMI and MIP.

Mortgage Registration Tax:
This tax is from the state, county and city.  All Minnesota mortgage borrowers must pay $1.15 per $500 of the mortgage.

Settlement or Closing Fee:
This fee is paid to the person conducting the closing, and is typically around $300.

Credit Report:
Lenders will order a credit report for all persons applying for the mortgage loan.  This report is around $60.

Recording Fees:
These fees are passed onto the county where the property is located to cover document recording costs.  This fee is around $25 to $40.

Just as there are several types of credit and financial situations, there are several different types of loan situations.  Here's a look at some of the various types of loans and the advantages and disadvantages of each.  This should help you to determine the loan that is best-suited for you.

Fixed Rate vs. Adjustable Rate Mortgage (ARM):

Just as their names imply, a fixed rate mortgage is a mortgage that locks you into one rate for the entire duration of the loan.  Adjustable rate mortgages, or ARMs, will adjust according to an index of the U.S. Treasury.  Please keep in mind that you always have the option of refinancing your home.  In doing so, you can change the status of your rate.

Advantages of Fixed Rate Loans:

• Certainty.  You will  always know what your rate is.  There will be no wondering if your rate will rise. 
• If the current interest rates are low, locking in at a fixed rate will ensure that when the rates begin to rise, you will continue to pay the low rate.
  

Disadvantages to Fixed Rate Loans:

• Be careful if the current interest rates are high.  If this is the case, taking out a fixed rate loan will mean that you will pay the high rate, even if the current rates begin to fall.
  

Advantages of ARMS:

• Typically, ARMs have a starting interest rate that is lower than the current rate.  The difference can be between 1 and 3 points.

Disadvantages of ARMs:

• Your ARM could rise quickly.  If this is the case, you could end up paying much more than the current interest rates in a short period of time.
• Usually, ARMs do not give you the option to switch to a fixed rate.   Your only option to escape paying a rising interest rate would be to refinance.

Federal Housing Administration (FHA) Loans:

The U.S. Departement of Housing and Urban Development (HUD) guarantees loans for low-to moderate-income home buyers.  These loans are backed by the Federal Housing Administration (FHA).  FHA loans are very popular for first-time home buyers in Minnesota.  If you qualify for an FHA loan, you will need to pay for an FHA appraiser to determine the value of the property.  You will also need to pay for mortgage insurance.

Advantages of FHA Loans:

• You can make a lower down payment.
• It is possible to qualify even if you have substantial long-term debt.
• If you take out an ARM FHA loan, it will only move 1 point per year.
  

Disadvantages of FHA Loans:

• You must pay a mortgage insurance premium, or MIP, which is equal to 2 1/4% of the loan amount on a 30-year loan.
  

Veterans Administration (VA) Loans:

These are available to people who have served in the military for a certain length of time.  To see if you qualify, call 651-296-2562 or 1-800-827-1000.  Surviving spouses are also eligible for VA loans.

Advantages of VA Loans:

• You can borrow the entire purchase price of the home.  No down payment required.
  

Disadvantages of VA Loans:

• You must pay a funding fee, which is 2% for veterans or those on active duty and 2 3/4% for those serving in the National Guard or reservists.  You can pay this fee as part of your monthly loan payment.
  

Assumable Mortgages:

A buyer can take over the seller's loan and make the payments that were negotiated by the seller years ago.  These types of loans carry higher interest rates, buy have lower closing costs.

A Caution About Predatory Lending.

Predatory lenders take advantage of people in difficult financial situations.  They will exploit those who have a lack of financial knowledge, which is why it is easy for first-time home buyers to fall victim to them.  Be cautious of the following:

• High Interest rates and fees.  Some loans will contain hidden fees.   Most fees are negotiable.  Be knowledgeable of what your lender charges.   Ask them up front for a list of their fees. 
• Small monthly payments with a large balloon payment in the end.  Some lenders will make an offer with low monthly payments.  Be sure to investigate how much the end of your loan will require you to pay monthly.   It could be set up in such a way that you would be required to take out a second loan in order to pay off the original one.
• Pre-payment penalties.  Some loans may penalize consumers wanting to pay of some or all of the entire loan early.  Minnesota law requires lenders to disclose these types of penalties at the time of application, and the lender must offer you an alternative, should you decline.
  

Depending on your loan type and amount of your down payment, you may be required to purchase mortgage insurance.

If you made less than a 20% down payment on a conventional loan, you will need to purchase Private Mortgage Insurance (PMI), which is paid monthly.  Once you gain 20% of your equity, then you may be released from this insurance. 

If you have an FHA loan, you will need to pay a mortgage insurance premium (MIP) of 2 1/4% of the total loan amount for a 30-year loan.  You cannot cancel your MIP under Minnesota law.