SANTA CRUZ (April 4, 2009) - Everyone has heard the news: mortgage rates are down, home prices are down and sellers are willing to negotiate; however, not everyone knows what to do next. Here is a quick summary of the most important things to do if you have ever considered buying a home.

You cannot seriously consider buying a home without first meeting with a mortgage professional to determine how much you can afford to spend on a home. This is basically a quick and simple process based on your income, credit history, current debts and cash available. Although all mortgages are now approved by automated underwriting software, your mortgage consultant should be able to determine your capacity to borrow money to buy a home.

Your mortgage consultant will ask you for one - two years of tax returns and W-2s, a current paystub from work (if you are an employee) and two months of bank statements from each account you plan to tap for your down payment and closing costs. With this information, your mortgage consultant will be able to obtain a loan pre-approval. This is a loan approval based on a presumed loan amount and sales price. When the property has been identified and the appraisal, purchase contract and preliminary title report have been reviewed, a final loan approval will be issued.

Once you know what the mortgage industry will allow you to borrow, you must determine for yourself what your family’s budget will allow you to spend on a mortgage. Contrary to popular belief, more often than not, the mortgage industry will still allow you to borrow more money than you will be comfortable with.

Keep in mind that the mortgage industry has some very liberal rules: it allows borrowers to receive a gift from family for the down payment, it allows sellers to pay for closing costs, a family member may be a co-signer to help the homebuyer qualify for the mortgage, the down payment may be as low as 3.5 percent of the sales price. Lenders allow borrowers to spend up to 65 percent (in ideal situations) of their gross income on their house payment. This ratio is uncomfortably high for most borrowers.

The mortgage industry also has some very strict rules: you must account for any large deposits in the last two months of your bank statements. Loans and cash from credit cards will not only not be counted towards the cash you need but they will count against you when it comes to calculating your debt-to-income rate. Any money that is moved around or received must be well documented or it won’t be counted.

When you have concluded how much you are willing to borrow (and how much help you may receive from family) and the maximum price you will be spending on a home, picking a real estate agent to help you through the homebuying process is your next step. Ideally, you will pick an agent that you either have been referred to by a friend or work associate or one that you have worked with and liked or one that you have met and like.

Your real estate agent will now guide you through the process of selecting, negotiating with the seller to finalize the purchase contract and assisting you through the escrow process.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.