When you have made a decision to buy your own home, one of the first steps to do is to establish the maximum amount of mortgage loan you can qualify for. Doing this beforehand gives you an idea of the price range of houses you should be looking at when you finally go home shopping.

Banks and lenders normally look at your total household income including your net worth as the index for determining the maximum amount of loan you can qualify for. The higher your net worth value is, the larger the loan amount you will qualify for. This means that both your down payment and interest rates will be considerably lower.

Debt-to-Income Ratios

Mortgage banks and lenders generally use debt-to-income ratios to calculate the maximum mortgage amount loanable. Debt-to-Income ratio is simply the percentage of your monthly gross income before taxes that is used to pay your monthly debts. There are two calculations for the debt-to-income ratio, the front ratio and a back ratio; these are generally indicated in the following format: 33/38.

The front ratio (33) is the percentage of your monthly gross income used to pay housing costs including principal, interest, taxes, insurance, mortgage insurance and homeowner’s association fees while the back ratio (38) is the same thing plus your monthly consumer debt costs which includes car payments, credit card debt, and installment loans but excluding car and life insurance payments.

Based on the above, it shows that a borrower’s housing costs will take up 33% of their gross monthly income. Adding in their monthly consumer debt to the housing costs, the total combined costs should not exceed 38% of their monthly gross income.

Obviously, these guidelines are flexible and subject to change. If you are only able to pay a small amount for your down payment or if you have a bad credit history, the more rigid they become. On the other hand, if you have impeccable credit or are able to put down a larger amount for down payment, they will become more flexible. Most Federal Housing Authority guidelines accept a debt-to-income ratio of up to 29/41.