When considering taking out a mortgage to buy a home, you need to carefully consider how much money you can afford to pay for the monthly payment. Since the amount you can borrow depends on the interest rate of the loan, most lenders base your maximum mortgage on the size of the monthly mortgage expenses rather than the size of the mortgage. Lenders use two ratios, one that compares the mortgage expenses to your total income and one that compares your total debt payments to your total income, to determine how much you can afford.
Check your paychecks to determine your pretax monthly income. If your income varies from month to month, use your average pretax income.
Multiply your pretax monthly income by 0.28 (28 percent) to determine your maximum monthly mortgage expenses. For example, if your pretax monthly income was $7,000, lenders would not want you to spend more than $1,960 per month on your mortgage expenses.
Multiply your pretax monthly income by 0.36 (36 percent) to determine your maximum monthly debt payments. For example, if your pretax monthly income was $7,000, lenders would not want you to spend more than $2,520 per month on your debt payments.
Subtract any other debt payments that you have to make each month to determine how much you can spend on your mortgage expenses. Other debt payments can include car loans and student loans. For example, if you have a $300 per month car loan payment, you would subtract $300 from $2,520 to get $2,220.
Use the lesser of the results from Step 2 and Step 4 to determine your maximum monthly mortgage expenses. In this example, since $1,960 is less than $2,220, your maximum monthly mortgage expenses should not exceed $1,960.
Some lenders may restrict your loan to less than the percentages used in this example. However, some lenders may be willing to go slightly higher if you have a solid credit history and you are willing to pay a higher interest rate.
Your monthly mortgage expenses include costs of private mortgage insurance, homeowner's insurance and real estate taxes.
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