Before you begin shopping for a house, you should find out the maximum amount you can afford to pay.  This is usually limited by the sum of two amounts:  the cash you can offer as a down payment and amount you can borrow.  

How much can you borrow?

The first step is to shop for a good lender.  (Click here for some excellent tips from Jack Guttentag, the Mortgage Professor, on how to do this.)  Guttentag gives top scores to online lenders Amerisave and E-Loan for "depth and comprehensiveness of the information provided," so you may want to start with them.  

At either of these sites, click "Calculators" on the toolbar, then on "How Much Can I Borrow?" (for Amerisave) or the "Home Affordability Calculator" (for E-Loan) to get a rough idea of what you can borrow.  In order to approve a mortgage loan, of course, a lender would need more information about your finances and an appraisal of the property you plan to buy.    

Many lender websites have calculators that give you a rough estimate of how much you can borrow.

How much should you borrow?

You'll probably be pleasantly surprised at the amount of money you'll be able to borrow--loan officers can stretch you to the limit (and beyond) of your ability to pay with creative devices like adjustable rate mortgages (ARMs), graduated mortgages, and interest-only loans.  But before you start house hunting, you should think carefully about how much you should borrow.  Here's a good resource for thinking this through.

Be aware that mortgage loans over $417,000 are called jumbos and carry a higher interest rate than those under $417,000, which are called conforming or conventional loans.  If possible, try to keep your borrowing below that threshold.

See if you can improve your credit score

Your credit report gives the lending industry's assessment of how good a credit risk you are. Since this is one of the factors that a lender considers before approving a loan, you'll want your score to be as high as possible.

The government requires credit reporting companies to give you a free annual credit report.  Make sure you go to annualcreditreport.com to get it.  (This government website explains why you should avoid all the imposter websites that also offer free credit reports.)     

It's a good idea to check your score early on, so you'll have time to improve it by fixing errors or making changes in your finances.  This CNN Money article offers suggestions on how to improve your score. 

Next step:  Shopping for a neighborhood and home.

©Lori Alden, 2008.  All rights reserved.