Q. I'm a first time home-buyer who has been approved for a stated income home loan of $200,000. My loan, however, comes with an 8 % interest rate. The actual home I buy will probably cost around $160,000. I need to buy this home on my own because my partner has horrible credit that would actually raise the interest rate more. And if I waited for an income based loan, it would be for a lot less money (but likely a better interest rate).

Here is my question: Is it worth getting a loan now at 8 % if that is the best I can do? ?

A. Your 8% loan is a little more than a percentage point higher than the current average rate for a 30-year fixed-rate loan. So that's not a big penalty. If you had said 12% or 13% waiting would make a lot of sense.

Now you need to figure out how much you can afford to spend on a house with your 8% loan.

Since you are a first time home-buyer, you don't have equity from a previous house to help with the down payment.

So let's assume you buy a $160,000 house, putting $5,000 down and borrowing the remaining $155,000 with a fixed-rate, 30-year loan. At 8%, you'd have to pay $1,137 a month for interest and principal. Taxes and insurance -- including mortgage insurance, since you are putting less than 20% down -- will add at least $200 a month to that, and probably more like $300 to $400 a month.

Conservatively, your total monthly payments would be $1,337. But you shouldn't be surprised if it was more like $1,500 a month. 

The general rules lenders use to determine if you can afford a house are:

• Housing costs -- including principal, interest, taxes, assessments or any other fees -- shouldn't exceed 28% of your gross, or pre-tax, income.
• Monthly debt payments – including your mortgage, auto loans, utility and credit card bills – shouldn’t exceed 36% of your pre-tax income.
  

That means you'd need an annual income of $57,300 to $64,285 to keep those payments within 28% of your pre-tax income.

If you added just $500 a month for car payments, credit card, gas, electric and other recurring bills, that goes up to $61,233 to $66,666 a month to meet the total debt rule.

If you waited until you could qualify for a 30-year loan at the average interest rate of 6.9%, your payments would be about $117 a month less.

Now your annual income could be as low as $52,285 a year to stay within the housing cost rule, and $56,666 to stay within the total debt rule.

You didn't say how much you expect to be earning, but the biggest mistake first-time buyers make is spending more than they can afford. So work backwards from how much you expect to make to figure out the price range you should be looking at.

Q. Can you tell me what the likelihood is, as a current homeowner but having filed bankruptcy in the past year (keeping my home and my car and those obligations current), that I could get a new loan to move into a condo with the same mortgage company. In other words, do you think my current mortgage company would be able to extend a loan to me? Also, will the amount of my proposed loan be affected by the bankruptcy?  Will I qualify for a smaller loan even if I may be able to make a substantial down payment?

A. Lenders consider each loan on a case-by-case basis. Your mortgage company may be willing to loan you money for a condo, but you shouldn't expect any special consideration because you are a current customer. If you apply for a new loan, it will evaluate your credit report and credit score as if you were a new customer.  While they will reflect the fact that you've kept your mortgage and car payments up -to-date, they will reflect your bankruptcy filing, too.

You don't say how long you've had your current mortgage, or what interest rate you are currently paying. But there are two reasons a new loan will almost certainly come with a higher rate:

• Mortgage rates have steadily risen over the past two years. The average cost of a 30-year fixed-rate loan – the most popular way to finance a new house – has been just below 7% for several months now. This time last year we were paying 5.61% and in June 2003 rates had plunged all the way down to 5.28% -- the lowest since Interest.com (and its ink-on-paper predecessors) began its weekly survey of major lenders in 1985.
• Because of your bankruptcy, you probably won't qualify for any lender's best rate. So expect to pay a penalty of at least two or three percentage points. The worst case is that your credit report is so badly damaged that you'll only qualify for what's called a sub-prime loan, which charges high-risk borrowers as much as 13% or 14%.

How much you'll be able to borrow will also depend on your credit score and the appraised value of the condo you want to buy. Having a substantial down payment will help, possibly a lot, because statistics show the more you put down, the less likely you are to default.  

The bottom line: Apply to four or five lenders, not just your current mortgage company. Compare the rates and other costs to find the best deal. But don't be surprised if your new loan comes with a significantly higher interest rate.

Have a question about your finances? Ask us at editors@interest.com.

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