How much can you afford?

Each lender develops its own credit policy, but there are some general guidelines, called "qualifying ratios." Qualifying ratios may be eased if you make a large down payment. However, most lenders (except for the Veterans Administration) for conventional mortgages will not grant loans to borrowers who have debt (house payments and personal long-term debt) in excess of 36 percent of their gross income.Non-conforming lenders, however, may allow higher percentages of debt. In your effort to get your financial house in order, you'll need to know if you have any serious debt problems. There are many online tools that can help you determine your debt ratio.

Your debt ratio measures the percentage of monthly income that is used to pay previous obligations. If you discover that your debts are greater than your monthly income, you'll want to start developing a plan to get out of debt as soon as possible.

For example. Credit Union Land (www.culand.com/debt-html) points out that all financial institutions, including credit unions, use various methods to help determine your ability to repay the loan.Credit Land provides an online calculator to help you determine if you are "loaned out." If you'd like to know what your debt ratio is, fill out the online form and click on the Submit It button. You'll get the results almost instantly. The online results (which are anonymous) indicate your debt ratio rating. This can alert you to any serious debt problems that could prevent you from receiving mortgage approval.

Timesaver If relatives are giving you financial assistance for your downpayment, make sure they provide you with a"gift letter" in advance. Gift letters show lenders that the funds do not have to be repaid. The financial institution you select may, however, require you to complete the gift letter on their particular form when you complete an application for a mortgage.

Keep in mind that a total debt ratio of 40 percent or more may indicate that you are carrying too much debt. For an FHA mortgage, total debt limits are 41 percent, and possibly slightly more if your credit is very good. However, each financial institution calculates this ratio slightly differently because they take different factors into consideration. For example, lenders sometimes consider factors such as the following:

• How long you've held the same job—this is 2 years of continuous employment if you have a part-time job, or if you have changed the type of work you are doing.

• Other liquid assets that enable a higher down payment to housing price ratio.

• The amount of cash reserves you'll have on hand after the deal closes.

If you want to figure your debt ratio with pen and paper, here's how. First, divide your total monthly debts (the housing expenses for the pro- posed loan plus other monthly credit obligations) by your total monthly income. For example, if your total obligations are $1,300 ($1,000 for housing expenses and $300 for other credit obligations), the debt ratio would be 32.5 percent ($1,300 - $4,000 = 32.5 percent). Remember, a low debt ratio results in a higher credit grade. In contrast, a high debt ratio means a lower credit grade.

A quick and dirty way to determine if you're carrying more debt than lenders like to see is to add up all your monthly debts (car payments, student loans,and other obligations) and divide by 12. If the result is higher than 10 percent of your income, debt is an area of concern. If your monthly debt is between 5 and 9 percent of your income, this should not prevent you from getting a standard mortgage. If your debts are less than 4 percent of your annual income, your debts should not cause a problem when applying for a home loan.

If you want the Internet to do all the work, go to the Homefair Web site (www.homefair.com). In the left column is a listing that includes the category Tools & Calculators. Click on Mortgage Qualifier. A few other online sources that can provide you with a quick idea of what you can qualify for are Excite (www.excite.com), Yahoo! (www.yahoo.com), and most online mortgage lenders, such as AppOnline.com (www.apponline.com) and Mortgage.com (wwwmortgage.com).

Some lenders and mortgage brokers work with borrowers with blemished credit histories. Many of these "sub-prime" lenders will allow the following:

• Your total debt load can be 50 to 60 percent of your gross monthly income (instead of the 36 percent guidelines used for "A" grade credit borrowers).

• The only proof of income you'll need is six months of bank statements (instead of tax returns, W-2 forms, or pay stubs). With 30 percent down, some lenders will only ask for a statement of income—called a "no documentation," or "no doc" mortgage.

Borrowers with less-than-perfect credit generally pay higher-than-market interest rates for their past mistakes and are required to pay a minimum 20 percent down payment. If you have a steady income but a poor credit history, you may want to consider a sub-prime loan with its higher-than-market interest rate. If you make each mortgage payment on time for the following year, you might be able to refinance at a lower rate. Shop online for sub-prime tenders with programs specifically designed to help individuals finance or refinance their homes. A few examples of sub-prime lenders are:

    Delta Funding (www.deltafunding.com) spe- cializes in non-traditional mortgage lending. 

    Eastern Mortgage (wwweastern-mortgage.com) focuses on sub-prime mortgages and home- equity loans. 

    Hanover Mortgage Company (www.hanovermc.com) gives attention to mortgages for people with not-so-perfect credit.

    Southern Pacific Funding (www.sp.funding. corn) concentrates on sub-prime loans for homebuyers.