How Much You Can Afford

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     In order to qualify for a mortgage, most lenders require that you have a debt-to-income ratio of 28/36. This ratio can vary depending on the down payment and the type of loan you're getting. A 28/36 debt-to-income ratio means that no more than 28 percent of your total monthly income (from all sources and before taxes) can go toward housing, and no more than 36 percent of your monthly income can go toward your total monthly debt (this includes your mortgage payment). The debt they look at includes any longer term loans like car loans, student loans, credit cards, or any other loans that will take a while to pay off.

     Here's an example of how the debt-to-income ratio works: Suppose you earn $40,000 per year and are looking at a house that would require a mortgage of $800 per month. According to the 28 percent limit for your housing, you could afford a payment of $933 per month, so the $800 per month this house will cost is only 24 percent of your gross income. Suppose, you also have a $200 monthly car payment and a $115 monthly student loan payment. You have to add those to the $800 mortgage to find out your total debt. These total $1,115, which is roughly 34 percent of your gross income. That makes your housing-to-debt ratio 24/34. Since lenders typically use the lesser of the two numbers, in this case the 28-percent $966 limit, you may have to come up with more down payment or else negotiate with the lender.

     If your current bills are too much for you, you may consider refinancing or debt consolidation to reduce your bills.