The first question that you would like to be answered when you feel that it is time to buy a home is how big of a home loan will you qualify for.

Mortgage lenders estimate this by looking at your debt-to-income ratio.

This ratio looks at your total debt that you would have if you add your mortgage payments to your current loans, such as credit card debt, car loans, and other personal loans, and compares total debt to your total income. 
As a rule of thumb, lenders would not like you to take out a home loan that would result in your having a debt-to-income of ratio that is more than 36 percent. If they do allow you, they may charge a higher interest rate.

Therefore, to be able to find the maximum amount for your home loan, you must determine your monthly gross income or your income before any deductions have been made such as taxes and other expenses, and then obtain what is 36 percent of this.

For example, if you have a gross income of $5,000 per month, then 36 percent of this is $1,800. If you are married and you will be applying for a joint loan, you should add your spouse’s gross income. To illustrate, if your spouse’s gross income per month is also $5,000, then your total income is $10,000 and 36 percent of this is $3,600.

Now it is time to take into account your other debts by getting the total amount of the monthly payments that you are making for these loans (credit cards, car loans, student loans, etc…). For example, this amount could be $1,500 for you and your spouse. Then, the maximum monthly mortgage payment that you would be permitted would be $3,600 minus $1,500 or $2,100.

Remember that this is just a guideline and may not necessarily mean that you can truly afford mortgage payments of $2,100 per month. Also, different lenders will have different preferences on debt-to-income ratio.

Also remember that the above value is a maximum and you would want to get a mortgage payment that is lower to make sure that you can really afford it and to provide you with some room for expansion in the future. Having determined a monthly mortgage payment that is comfortable for you, you can now work backward to determine the total price of the home.

For a $2,000 per month mortgage payment, for example, you would be able to purchase a home worth $340,000 for a 30-year mortgage loan at a fixed rate of six percent. If the interest rate that you could get is seven percent, you would only be able to purchase a property that is worth $300,000.

The above computations assume that you would be able to obtain a loan for 100 percent of the selling price. This may not always be the case because oftentimes a down payment is required. Therefore, the selling price of the home that you would be able to buy would even be greater if you have the money for the down payment.

Take note that for mortgages where the loan value is greater than 80 percent of the value of the home, private mortgage insurance would have to be added to your monthly payments.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.