How much i can afford for a house payment is a very important question and one that is asked by many clients when they are trying to secure a new mortgage. Although it may seem very complex it is actually pretty easy to determine how much of a house payment you can afford to pay every month.

The major way lenders determine how much you can afford every month is to calculate your debt to income ratio. This ratio, often referred to as DTI or debt ratio is a comparison percentage of your income to monthly expenditures.

The lenders will take your gross monthly income and divide your monthly bills into the amount. So if you gross (before tax) 4000 a month and have $2000 in bills your DTI is .5 or 50%. The simple calculation for this is as follows 2000/4000=.5 or 50%

As a rule of thumb you should stick to a debt ratio of around 40-42%. This is because the bills used to calculate your ratio are only your revolving accounts like credit cards, mortgage payments, loans and other monthly revolving balances.

The calculation does not take into account your power bills, gas for your car or other daily living expenses like that. So you maybe able to afford a house and have a high DTI it is not recommended a or advised by many financial experts.

So in order to avoid being short on cash every month try and keep your deb ratio the lowest you can and buy a realistically affordable home for your income levels.

Your debt ratio (monthly payments)/(gross income) is one of the key metrics lenders use to determine whether you have the ability to repay the loan they are about to give you. The basic calculation is simple enough to do on the back of a napkin, but there are subtleties.

First, many lenders use two debt ratios called the Top Ratio and the Bottom Ratio. Lenders also call these the Front-end and Back-end ratios respectively. Both ratios are important to you because many lenders use both ratios to qualify you for a loan. If you are over the limit on either ratio you may not get the loan. Lenders have different criteria but commonly they look for a Top Ratio of 33% and a Bottom Ratio of 42%, which you may see written as 33/42.

The Top Ratio is calculated as proposed monthly housing expense for the subject property divided by gross monthly income. The monthly housing expense for the property you are buying includes Principal, Interest, Taxes, Insurance, HOA Dues, and Mortgage Insurance. To work an example assume you are buying a home for $300,000 with 20% ($60,000) down with an annual property tax rate of 1.25% of the purchase price, annual insurance of $546.48 and monthly Home Owner's Association fees of $125. You apply for a loan of $240,000 at 6.5% interest. Here is your proposed monthly housing expense:

Principal and Interest: $1,516.96
Monthly Taxes: $ 312.50 ($300,000 times .0125 divided by 12)
Monthly Insurance : $ 45.54 ($546.48 divided by 12)
Mortgage Insurance: $ 0.00 (You put 20% down so don't need it)
HOA Fee: $ 125.00

Your total proposed monthly housing expense is $2,000. Note that even if you pay your taxes and insurance annually or semi-annually you still include the prorated share of those expenses in your monthly housing expense for the purpose of calculating the Top Ratio.

With a monthly housing expense of $2,000, to satisfy the Top Ratio of 33% you will need a monthly gross income (income before taxes) of $6,000.

Now that you have calculated your Top Ratio you need to calculate your Bottom Ratio. To calculate your Bottom Ratio you simply add all of your other monthly debt payments to the proposed monthly housing expense you just calculated and divide by your gross monthly income. Here is the formula:

Bottom Ratio =
(Proposed Housing Expense + Other Monthly Debt) / Gross Income

In your other monthly debt you include payments on revolving and installment debt (e.g. credit cards and car payments) plus alimony and child support if any. You only include the minimum monthly payments for these items in the calculation. If you own other property that has negative cash flow you have to add the negative cash flow to your monthly debt. (Remember to use only 75% of rental income when calculating cash flow on a rental--that's all lenders will count to allow for vacancies and maintenance.)

To build on our example for the Top Ratio let us suppose you have a car payment of $187, credit card payments of $83, and child support of $250. Your total other debt comes to $520. Using the $2,000 proposed housing expense, $6,000 monthly gross income, and applying our formula for the Bottom Ratio we have:

Bottom Ratio = ($2,000 + $520) / $6,000 = 42%.

Voila! You qualify! At least on these metrics. You still need assets and a good credit score. And remember, you did not included utiltity bills, your child's piano lessons, or the cost of the private school your child attends when you calculated your Bottom Ratio. The Top and Bottom Ratios are just rough tests of affordability that a lender will use to qualify you for a loan. Only you know for sure what you can afford--or what you are comfortable paying, which is a different question.

While your mortgage professional can tell you what the maximum house payment is for which you qualify, only you can decide how much you can afford. It's always a good idea to review your budget to determine what house payment will be comfortable for your income and expenses.

This is why it is important to get pre-approved prior to looking for homes. Not being able to afford as much as you qualify for is a good problem to have. Not qualifying for what you can afford or want it not such a good problem to have. Particularly after you have fallen in love with a specific property.