A. Most mortgage lenders use some qualification ratios to determine how much loan you can get. The following are three common ratios used by the banks.
Maximum Mortgage Payment (Rule of 28%)
The rule of thumb in determining how much home you can afford is that your monthly mortgage payment should not exceed 28 percent of your gross monthly income (income before taxes). For example, if you and your spouse have a combined annual income of $120,000, your mortgage payment should not exceed $2,800.
Maximum Total Housing Payment (Rule of 32%)
The cost of home ownership is more than mortgage, you need to at least add homeowner's insurance, HOA fee, private mortgage insurance (PMI) if applicable, and most importantly, property tax. The total amount should not exceed 32 percent of your gross monthly income. So for the couple mentioned above, their total monthly housing payment cannot be more than $3,200 per month.
Maximum Monthly Debt Payments (Rule of 40%)
Finally, other than mortgage, you probably also have other debt payments, such as student loan, car loan, credit card payments, etc. The total of all your monthly debt payments should not exceed 40 percent of your gross monthly income. In the above example, if the couple with $120,000 gross income wanted the highest mortgage payment they could get, they could have up to $800 in other debt.
Use our Home Affordability calculator to see how much home you can get approved by a lender.