Your mortgage lender is chiefly concerned with your ability to
repay your mortgage. To determine if you qualify for a loan, we’ll consider your credit history, monthly gross income, and how much cash you'll be able to accumulate for a down payment (which generally runs anywhere from 5 to 20 percent of the home’s purchase price).
So, how much house can you afford? You can easily calculate the answer using two standard debt-to-income ratios (here is a Mortgage Calculator that will calculate how much house you can afford):
1. The housing expense, or front-end ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your
gross monthly income.
To calculate your maximum housing expense, multiply your annual salary by 0.28 and divide by 12(months).
2. The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all your debt obligations, including mortgage, car loans, child support, alimony, credit card bills, student loans, and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income.
To calculate your maximum allowable debt-to-income ratio, multiply your annual salary by 0.36 and divide by 12 (months).
Example: Let's consider a home buyer who makes $40,000 a year. The maximum amount available for a monthly mortgage payment at 28 percent of gross income would be $933. However, the total debt payments each month should not exceed 36 percent, which comes to $1,200.
Try this Affordability Calculator