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How Much House Can You Afford?

The amount of loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe"
amount for your mortgage payments. A fairly standard ratio is 28/33. Certain mortgage plans sometimes use more liberal ratios - for example, the FHA currently uses 29/41.

How it works: With a 28/33 ratio, you'd be allowed to spend up to 28% of your gross monthly income for mortgage payments.

The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 33% of your gross monthly income.

To calculate exactly how much you may borrow, you also need an estimate of current interest rates.

Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000. If your rate were 8%, the loan amount would be a bit less than $150,000.

As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and Homeowner Association fees (if applicable) you might need to pay, which are considered part of your monthly expense.