Numbers to Know Before Applying for a Loan

EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.

Lenders look at three things when you apply for a mortgage: credit score, debt-to-income ratio and down payment. "If you've got two of the three elements working for you, you're in good shape to buy," says Jim McMillan, a senior loan officer with JP Mortgage/JPMorgan Chase.

All lenders are credit-score driven these days. FICO scores, the most commonly used, range from 300 to 850. The higher your score, the more flexible lenders will be. With a score of 700 or higher, syas McMillan, you'll be considered an A borrower and qualify for the best rates.

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Another consideration is your debt-to-income ratio. Traditionally, lenders have followed the 28/36 rule: No more than 28% of your monthly gross income should be dedicated to your mortgage payment, property taxes and insurance, with total debt payments equaling no more than 36% of your gross income.

This means if you make $40,000 a year, your payment for your mortgage, property taxes and insurance should be no more than $933 a month. Payments on total debt should be no more than $1,200 a month.

But if you have no other debt, you can dedicate 36% of your income -- $1,200 in our example -- to housing payments. With an FHA-backed loan, you may be permitted to apply up to 41% of your income to total debt.

The more money you put down, the less risk the lender takes on - and the more likely you are to snag the loan. A 20% down payment is the threshold at which you're exempt from private mortgage insurance, which can add a few hundred dollars to your monthly payment. PMI is totally tax-deductible for 2007 if your adjusted gross income is less than $100,000, and Congress is expected to extend the tax break into 2008. Contracts written before 2007 are ineligible for the deduction.

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