In my case, since I have a gross income of $2500 a month, this is a pertinent question even more than it is for people with higher incomes. The debt service can significantly cut into how much house you can be approved for, because a regular payment of debt service is a lot bigger chunk of $2500 than of $5,000 or $10,000.
At my income, with no debt service and no down payment, on a 7% 30 year mortgage with $1000 homeowner's insurance (I have no idea how much these things cost) and $1500 property taxes (about right for the size of house I would buy), Bankrate says I can qualify for about $103,000. That seems pretty good to me!
My question here is, should I bother saving for a down payment, or is it more important to eliminate my $6800 in credit card debt? I don't think I could do both in a short period of time unless my income rose substantially, and hell, if my income rose that much I could qualify for whatever I wanted anyway. So let's assume that I can either pay down the debt, or save up $6,000 (on account of having to pay minimums on the credit card while saving.)
My minimum payment right now is $140. So if I had an extra $140 debt service, with no down payment, I could qualify for only $62,000. If I had the $6,000, I could qualify for only $6,000 more, or $68,000.
However, if I went into my mortgage with no down payment at all, but also no credit card debt, showing only my student loans, I could qualify for $83,000.
This exercise is pretty clear to me. Paying off my debt and reducing the monthly amount of expenses significantly increases the amount that I can borrow, because I'm paying the debt service into the mortgage instead of the card.
What about my student loans? How much more house could I get if I reduced the payments as much as possible? All of my loans are consolidated with Sallie Mae, so they have a number of payment plans. The Grad Choice plan appears to lower the payment substantially for two years (presumably while you are in graduate school) - for me that would be $51 a month. I could qualify for $96,000 with that loan - but the payments would rise to $151 permanently after two years, which wouldn't be so bad since I'm already paying $150 on them now. You have loan options with the reduced payment from 2 to 5 years - the 5-year-reduced option is $62 a month for five years and $184 a month after that - ouch. In order to get the most mortgage, the best plan would probably be to take the 2-year reduced, just to get through the mortgage-acquiring process, and then switch back as soon as possible. While that would certainly get me a larger mortgage, I don't think I'd want both a larger mortgage payment and a rising student loan payment at the same time. But it might be an option to try to get a better rate and allow at least a little flexibility above what I might otherwise qualify for.
This is also a really good example of why I absoLUTELY cannot buy a car with a loan, if I want to think about buying a house. Even a tiny loan payment would really knock down the amount I could qualify for on my own. So in this case, if we move into a house that's far enough from work that I need to drive, it would make a lot more sense to buy a car in cash than to use that cash for a down payment. But what effect would having even a small downpayment make on what rates I could get?
I checked with my credit union's online calculator, and I can get a 100% LTV at 7.375% from them, although I would get a slightly better rate (7.125%) if I had $3,000 for a 97%, or $5,000 down for a 7/1 ARM at 6.5%. (Anything that is not one of those 30 year plans has to have at least 5% down.) A 20-year loan would get me 6.5%. But in order to actually get the $5,000, that might require not paying down the debt as aggressively... Ah, to have enough money to do both. =) As with everything, I think the answer is going to be, do both! So I'm going to try to get the $5,000 together, while lowering the debt as much as possible. I think in the long run I'll save more money and get a better loan if I can qualify for a regular loan, if I have 5%, than if I have no debt and also no money.
Around here, I could actually get a nice little house for $83k (because I don't intend to have children and send them to school in that area) and the mortgage payment would be only $550, which is a lot less than our current rent of $695. I'm thinking about houses because depending on how Boyfriend's career situation goes, we might be staying here for several years, in which case I'd like to buy a house, and he has agreed that it would be best if I bought it and he paid me rent, to avoid possible troubles if we break up (and also because he won't be paid much during those years anyway.) So it's something to think about for the future.