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It's a common mistake for home-buyers-to-be: They focus on saving as much money as possible for a down payment instead of paying off other debts. A better approach is to use extra cash to eliminate credit-card and other high-interest consumer debt even if that means you can put down less on your future home, says Lori Vella, senior vice president of national lending for Washington Mutual. How Much Can You Afford? The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and home owner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home). But the more money you can muster for a down payment, the more options you will have. For example, Fannie Mae's new "start-up mortgage" allows borrowers who can put down 5% to qualify for a loan on a smaller salary than with a 3% down payment. You will need to find a Fannie Mae-approved lender to take advantage of this program. Private lenders are also coming up with their own programs to tap into the first-time home buyers' market. Washington Mutual, for example, offers a program for buyers with a 10% down payment: Instead of charging for mortgage insurance, the savings-and-loan builds the cost into the interest rate, making it tax-deductible (which mortgage-insurance premiums aren't). There's no income limit to qualify for an FHA-insured loan. However, since these loans are geared toward helping first-time home buyers and low- to moderate-income families, there's a limit to how much you can borrow. The amount varies from region to region, but it's capped at $290,319 in high-cost areas ($403,750 in Hawaii), says Laurie Maggiano, a HUD spokeswoman. To check your area's ceiling In this new era of interest-only loans, many home buyers are skipping this advice. But if you can swing it, this is still the way to go. Not only will this provide some equity in your home, but it's also a way to avoid private mortgage insurance, or PMI. (This protects the lender if you default on the loan.) Costs for PMI can be significant over time " about $40 a month per $100,000 of the loan, according to estimates by the Federal Trade Commission. Pay Closing Costs Upfront Wrapping them into your mortgage means you'll end up paying interest on that extra few thousand dollars over the lifetime of the loan, according to Consumer Reports. So pay upfront if you can.
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