How Lenders Decide the Loan Amount You Can Afford

The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and nonhousing expenses. Non-housing expenses include debts such as car payments, student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of your income. Different loan programs will naturally have different guidelines.

The lender also considers cash available for down payment and closing costs, credit history, bill payment history, etc. when determining your maximum loan amount. Additionally, you may also want to estimate how much of a house payment you can afford to get a better idea of the loan amount you may need. If so, complete the How Much Can You Afford worksheet below.

How Much Can YOU Afford Worksheet

TOTAL GROSS MONTHLY INCOME
(Monthly Gross Pay + Other Gross Monthly Income) $__________________

RATIOS AND DEBTS
Total Gross Monthly Income x 29% (Housing ratio) $__________________ (2)

Total Gross Monthly Income x 41% (Debt-to-income ratio) $__________________ (3)

TOTAL MONTHLY DEBT PAYMENT
(any installment debts with 10+ months remaining, such as credit cards, car payments, loan repayments, etc.) $__________________ (4)

Subtract Line (4) from Line (3) $__________________ (5)

MAXIMUM MORTGAGE LOAN PAYMENT ALLOWED

(enter whatever is less, Line (2) or Line (5) $__________________ (6)

Multiply Line (6) by 20% (Estimated taxes & insurance) $__________________ (7)

Subtract Line (7) from Line (6)
(Maximum principle & interest payment allowed) $__________________ (8)

Divide Line (8) by a factor of 5.68 $__________________ (9)

MAXIMUM MORTGAGE LOAN AMOUNT

Multiply Line (9) by $1,000 $__________________