How Much Will The Bank Lend?

Besides having funds for a down payment and closing costs, the other major factor in your home purchase decision will be how much you can borrow. 

When you apply for a mortgage, the lender will consider both your earnings and your existing debts in order to determine the size of your loan.
Lenders generally use the following tow qualifying guidelines to determine what size mortgage you are eligible for:

• The amount of money you owe for mortgage payments, property taxes, insurance and condominium or co-op fees, if applicable, should total no more than 28 percent of your monthly gross (before-tax) income.  This is called the housing expense ratio.
• The amount of money you owe for the above items plus other long term debts should total no more than 36 percent of your monthly gross income.  This is called  the total debt to income ratio.

Basically, lenders are saying that a household should spend no more than about one fourth of its income (28%) on housing and no more than about one third on total indebtedness (housing plus other debts). 

Lenders feel that if they follow these guidelines homeowners will be able to pay their mortgages comfortably.

These ratios are flexible guidelines.  If you have a consistent record of paying rent, that is very close to the amount of your proposed monthly mortgage payments or if you make a large down payment, you may be able to use somewhat higher ratios. 
Some lenders offer special loans for low and moderate income home buyers that allow them to use as much as 33 percent of their gross monthly income for housing expenses and 38 percent for total debt.

A mortgage lender will use all the relevant data - your income, your existing debts, the purchase price of the house, your down payment, the interest rate on the loan, and the costs of property taxes and insurance - calculate whether you qualify to borrow the amount of money you need to buy the house. 

Rather than guessing or estimating how much you can afford to spend as your lender or mortgage broker to give you a full assessment and letter stating how much you are qualified to borrow.  The true amount may be much more or less than you think.