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Calculating the Affordable House Payment

Lenders look at two criteria for determining your "affordable "house payment. The amount you could easily afford based on your income only ... and the amount you can realistically afford based on your income and overall debt.

The examples here, use a ratio of 28% based on income only, and 36% based on income less debt.

In practice, these 28% and 36% ratios are conservative, some lenders, and some lending programs allow higher ratios. For example, FHA allows 29% / 41%.

CALCULATING THE MAXIMUM AFFORDABLE HOUSE PAYMENT
Now that you have your total income and total monthly payments calculated, the next step is to calcualte the maximum house payment you can afford, based on your income.

To do this, multiply your monthly income by .28.

This is how much house payment most lenders feel you can afford, based on your monthly income. Most lenders would agree our example couple have the income necessary to support a $ 1252 ($4471 x .28) monthly house payment.

CALCULATING THE DEBT RATIO
Now, the lender will want to look at the overall debt ratio which should be 36% or less.

By taking our example couple's $1252 mortgage payment, and adding it to their $402 monthly debt payment, and dividing by their monthly income:

The example couple will need to reduce their monthly house payment to $1207 to bring this ratio into line.

NEXT: Examining the House Payment