A borrower may determine the total gross income before any deductions, and multiply by 0.28. This method is what most lenders use as a guide to determine the total housing cost for which the borrower may qualify. Lenders may use a higher percentage. According to Mortgage Calculator, the old formula to determine how much a borrower could afford was roughly three times the gross annual income, but this formula has proven unreliable.
Taxes, maintenance, insurance, private mortgage insurance and other expenses must factor into the monthly cost of the house. Typically, lenders want monthly payments of between 28 and 44 percent of monthly income. Borrowers with excellent credit may exceed 44 percent, but this is allowed only rarely.
The borrower should also determine the debt to income ratio. To do this, the borrower writes down all monthly payments that extend beyond 11 months into the future. This can include car loans, installment loans, credit card payments and other types of personal loans. Multiply the gross monthly income by 0.35, and subtract monthly debt payments from the result. The remainder is the monthly amount the borrower could afford to pay. Another factor is the value of the property. A lender will not loan more money than a property is worth, though the borrower may pay the difference between the purchase price and property value to obtain a loan.