By now you are convinced of the many benefits of owning a house and are mentally ready. Now you must consider how much can you afford and where the money will come from.

Lenders use two ratios, front and back, to see how much money you qualify for. For conventional loans (loan amount less than $333,700 in 2004 as set by Fannie Mae and Freddie Mac), most lenders use the 28/36 ratios (front and back, respectively). Ratios higher than 28/36 are not desirable by lenders although different lenders may use different front and back ratios. Federal Housing Administration (FHA) and the department of Veteran Affairs (VA) use more liberal ratios for their loans (29/41 and 41/41 respectively).

Very few of us are fortunate enough to have cash for a 20% down payment plus closing costs. Worse, if you do not have 20% down, lenders will make you take out private mortgage insurance (PMI) to protect them in the event you can't pay. Sources of financing can come from gifts from family member(s), public programs, your investments, and lenders.

Your family can give you a gift with no tax consequence to them as long as the gift amount is less than $11,000. Do not take cash. If you have family members overseas, sometimes this is how money is transferred to avoid transaction costs. But this will put you in a lot of trouble. Lenders will be very suspicious of the large amount of cash deposited in your bank account. They will ask you for proof that the money is legal.

Speaking of legal money, this is why you should not take cash from a family member: Since September 11, money transactions are monitored more closely to make sure they are not being received from, or channeled to, a terrorist network. It is more difficult to prove sources of cash than checks or proper bank transfers. Take a check and keep a copy of it after you deposit the money in the bank, or pay transaction or currency conversion fees rather than risking hassles and delays in the loan process.

Some lenders may restrict down payments received from third parties. Therefore, planning ahead is critical. Most lenders will ask for bank statements from the last two or three months. Deposits made before that time period may not be scrutinized, sparing you some hassles.

The Department of Housing and Urban Development/Federal Housing Administration (HUD/FHA) offers loans with a low down payment (203(k) loans). HUD does not offer loans directly, however. Rather, you will need to go through a HUD approved lender for an FHA loan. To find a list of HUD approved lenders in your state, click on the lender selection web site.

There are several advantages to obtaining an FHA loan: low down payments (3-5%), more relaxed qualifying ratios, easier qualification for people with less than ideal credit scores, assumability (ideal in a rising interest rate market when you resell your house), and lower out-of-pocket cash at closing, as you can roll many closing expenses into the loan.

The downsides are that there are limits on the price of houses you can buy, the paperwork is often time consuming, settlement costs can be expensive, and mortgage insurance premium (MIP) is required for loans of more than 80% of the house’s value.

Almost every city or county has programs to assist first-time homebuyers. These programs are not usually well advertised and are not known by many home buyers. If you do some research, you may be surprised to find that you qualify. The best place to start is the web site of your state or county/city housing division. If you can't find the information there, call them.