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.Here's 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.
For Example: 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).
Begin the home buying process by using a mortgage
calculator to determine how much you can afford, or visit a REALTORŪ or mortgage
lender, and they can analyze it for you.