Review your finances to figure out how much mortgage you qualify for.
Rounding Up the Finances
Gather financial documents to calculate your maximum mortgage amount. This information includes income; assets, including investments and bank account reserves; and your monthly debt payments, which you can find on your credit report or monthly statements from your creditors. Total your pretax income, add up your monthly debt payments, and find the sum of your available funds. These figures help you establish your debt-to-income ratios, commonly called DTI, and your down payment amount -- all factors that affect how much you can borrow.
Calculating the Ideal Housing Payment
A housing payment includes loan principal, interest, property taxes and homeowners insurance, and the sum of these should equal about 28 percent of your monthly income. Lenders generally consider a total housing payment that is within 28 percent of your earnings -- a 28-percent DTI -- healthy. Multiply your gross income by .28
to get a housing payment that achieves the desired debt-to-income. For example, a gross income of $4,000 results in a maximum housing payment of $1,120. The housing payment DTI is known as the "front-end" DTI, and is only one of two DTI ratios lenders consider.
Finding Your Back-End Ratio
Interest Rate Matters
The lender finances a maximum loan amount based on your ability to make the monthly payment. The interest rate affects whether, for example, you can achieve a monthly payment of $1,120 or less on a $150,000 loan amount. If you get a 5.5-percent interest rate on a 30-year loan, after factoring estimated taxes of about $150 and monthly insurance of $50, you can remain well within the desired payment range. If instead you qualify for a 6.5-percent interest rate, your total housing payment exceeds the target amount, which means you must lower the loan amount, pay off debts, or lower your interest rate.
Down Payment Consideration