Can You Qualify for a Mortgage? And what rate can you expect?

This is the first, and biggest question. If you can’t comfortably manage the monthly mortgage payments, there’s no point in going any further. Notice we said comfortably – if you have to stretch to fit a mortgage in your budget, buying a home isn't for you, at least not yet. At the very least, you might consider a less-expensive property that won’t stretch your budget as far.

In evaluating a mortgage application, lenders look at two budget numbers. First, they’ll usually want to see that your monthly mortgage payment won’t exceed 28 percent of your gross monthly income. That includes the mortgage itself, along with taxes, homeowner’s insurance, mortgage insurance and any other fees that are billed along with the mortgage. Your gross income is your income before taxes and other deductions.

On top of that, they want to see that your other monthly debt payments – for car payments, credit cards, child support and any other long-term debt – do not exceed 36 percent of your gross monthly income if you’re applying for a standard mortgage.

These limits are for conventional mortgages. If you’re thinking about an FHA, USDA or VA mortgage, total debt can go above 40 percent, and up to about 31 percent for the mortgage payment.

You also need to take into account the down payment, which typically ranges from 3.5 percent to 20 percent of the home purchase price. But before we talk about that, you first have to consider your credit score.

Credit scores get a lot of attention, but many people worry about them too much. The fact is, only about one-third of U.S. consumers have a FICO credit score below 650, according to the company. Over half have scores over 700, generally considered the mark of good credit.

If you have at least three lines of credit – credit cards, auto loans or any other kind of loan-based debt – and have kept up with your payments, you’re probably in good shape. You can even have missed a payment or two and still have decent credit, provided you didn't go more than 30 days past due.

If you've got a credit score of 700 or better, you should be able to qualify for a mortgage, provided you meet the other requirements. However, the lower your score, the higher interest rate you’ll end up paying.

The best rates go to borrowers with scores of 740-760 and above. If you’re around 720, expect to pay about a quarter-percent more; perhaps a half percentage point higher if you’re at 700. You can still qualify for a mortgage with a credit score in the upper 600s, but be aware that interest rates increase fairly quickly once you get into that range.