Low mortgage rates and special incentives for first-time buyers are making the dream of home ownership a reality for more individuals and families. As you begin your search, you'll want to determine how much house you can afford and what type of mortgage is best for your budget.

In general, four factors will influence your ability to buy that dream home. They are:

• how much of a down payment you will make. The more cash you put down, the less you'll have to borrow.
• the amount you need to borrow (your mortgage) to cover a monthly payment for the loan principal (amount borrowed), interest ("price" charged for your use of the lender's money), taxes ( a portion of property taxes), and insurance.
• the mortgage interest rate.
• the repayment terms of your loan.

When applying for a mortgage, your current earnings and expected income during the next few years may influence your borrowing power. Outstanding long-term debt and how long you expect to stay in the home you're buying may also be considered.

Most realty agents recommend getting preliminary approval for a loan, usually by getting "pre-qualified" or "pre-approved" for a certain monthly payment. Getting approved for a loan requires having a lender verify your financial situation, including your current assets (income, savings, investments and other sources of revenue) and your liabilities (existing loans, credit card balances and other obligations). Using this information, the lender will evaluate whether there are sufficient funds for the down payment, whether you have adequate income to make monthly payments, and your overall credit-worthiness, which is based on a review of your borrowing history.

According to many real estate professionals and lenders, the biggest reason people get turned down for a loan is poor credit. Reviewing your credit status and correcting any mistakes before applying for a loan can help you avoid surprises or disappointments. Consumers may request a copy of their credit report from one of three major reporting services:

Equifax: 1-800-685-1111

Trans Union: 1-800-851-2674

Experian: 1-888-EXPERIAN (1-888-397-3742)

A small fee may apply, although if you've been denied credit recently, federal law mandates that the lender tell you which company supplied the information. You have a right to a free copy of your report from that company so long as you request it within 30 days of the credit denial.

Pre-qualification, based on numbers you supply to a lender, is an indication of the range of what you can afford. Getting pre-qualified is neither a commitment to loan you money, nor is it an obligation by you to borrow from a particular lender.

Lenders typically use one of two guidelines when evaluating a loan request. Most lenders will limit the loan amount to a percentage of your gross monthly income or to a multiple of your annual household income.

As a general rule, individuals or families can usually handle a housing payment that amounts to 25- to-28 percent of their gross monthly income. Following this guideline, if gross monthly income is $3,500, monthly payments (inclusive of taxes and insurance) in the range of $875 to $980 are considered reasonable. Some lenders use an alternate ratio that allows 36 percent of total monthly income for housing expenses and other long-term debts, such as car loans, credit card payments and obligations for child support. (Monthly living expenses for utilities, groceries, entertainment, medical and auto insurance are not calculated in this formula.)

Another guideline, based on gross annual household income, assumes most borrowers can afford up to 2.5 times their gross annual income. This means a borrower with total income of $40,000 may qualify for a loan of up to $100,000.

Whether using a "multiplier method" or a "percentage method," prospective home buyers should allow for closing costs and moving expenses. (Closing costs are the fees and taxes that are paid when the deed is transferred. These usually amount to 5-to-10 percent of the mortgage amount. Moving expenses include costs for movers, as well as "move-in" deposits for utilities and other "necessities").

Many lenders provide work sheets and charts to help you calculate your borrowing power, along tables so you can compare payments at different rates and for different loan periods. (Some real estate brokers and financial institutions even have "mortgage calculators" on their Internet site to help you determine what you can afford.)

Your borrowing power can be increased with favorable interest rates and terms. With lower rates, you can borrow more money. Different types of loans and the duration of the payback period will influence the interest rate that will be applied to your mortgage. In general, the shorter the term of the loan, the lower the interest rate.

There are dozens of different types of mortgage programs from a wide variety of financial institutions, including mortgage companies, saving and loan associations, commercial banks and credit unions. Prudent consumers will find it pays to compare options to find the right loan for their particular situation.