Get ready, get set -- then go after a mortgage

NEW YORK -- The arrival of spring signals the start of home buying season, and many young apartment renters are wondering if they can afford a house.

Home ownership has risen steadily in recent years because mortgages have been available at relatively low interest rates, currently about 7 percent for a fixed-rate loan. Nearly 68 percent of all American families own their own homes, according to U.S. Census data.

Still, qualifying for a mortgage can be daunting. But there are ways that first-time buyers -- or even repeat buyers -- can make the borrowing process easier, experts say.

It may seem obvious, but would-be buyers should consider whether purchasing a home is compatible with their lifestyle.

"If you're going to be moving a lot with your job, or if you don't want to be bothered with things like maintenance, then it might make sense to continue renting," said Virginia B. Morris, author of "A Woman's Guide to Personal Finance."

Badgering accountants

One of the much-touted advantages of home ownership is that people can deduct their interest payments and real estate taxes when calculating their income taxes. But Morris cautioned against letting potential tax deductions become the deciding factor in whether to buy.

"Tax accountants are always badgering young people to buy something because they can save on income taxes," Morris said. "It's true that you can. But if you have every bit of your money tied up in your house, then you won't have much of a life."

Even before you go house hunting, you should educate yourself about the mortgage process, said Bud Carter, a residential finance specialist with the Mortgage Bankers Association of America in Washington, D.C.

"The Internet is loaded with information about how to buy a home and where to get a mortgage," Carter pointed out. "There are also calculators to help people determine how much they can afford to spend."

Besides the Mortgage Bankers' site at www.mbaa.com, some other good places online to get "how to" guidance include the Life Advice topics at www.metlife.com and the "Home Buying 101" series at www.homestore.com. For an idea of interest rates available nationwide, check out www.bankrate.com and www.hsh.com.

Key questions

Two key financial questions must be answered: Do you have enough cash to get the process started, and, what is your credit rating?

To qualify for the best interest rates, you generally need to make a cash down payment equal to 10 percent to 20 percent of the purchase price of the house. You'll also be required to pay closing costs, averaging about 2 percent of the purchase price, to cover such things as the mortgage loan origination fee, title insurance and the property appraisal.

In addition, most people will want to have additional cash on hand for the post-purchase expenses that most new home buyers incur, such as making necessary plumbing and electrical repairs, painting and purchasing new furniture.

"First-time home buyers also need to focus on their personal credit report," said Marshall Gayden, senior vice president for real estate sales with Coldwell Banker in Mt. Laurel, N.J. "Your credit score determines what you can do."

The most commonly used score is called a "FICO" after Fair, Isaac and Co., the San Rafael, Calif., firm that developed the mathematical formula. Consumers can get their scores -- along with their credit profiles and some hints on how to improve them -- at www.myfico.com for $12.95.

E-Loan Inc., an online lender at www.eloan.com, and some others will make credit scores available for free if you register at their sites.

Lenders generally want to see a FICO score of 640 or above for buyers to qualify for the best rates, experts say.

Clean up credit problems

Gayden suggested young buyers "make sure their credit is in order" before they begin the mortgage application process.

"If you have a lot of credit card debt, get that under control. Clean up any problems on the credit report," he said. "If you're carrying too much debt, it will limit the size of the mortgage you're allowed to have."

Assuming you're got your cash together for a down payment and an acceptable FICO score, just how big a mortgage should you go shopping for?

The rule of thumb is that your mortgage payments, real estate taxes and homeowners insurance should not exceed 28 percent of your gross income. That is, if you earn $4,000 a month, your housing costs should come in at $1,120 or less.

And housing costs plus the debt from credit cards, car loans and personal loans, should not exceed 36 percent of your income.