In addition to prevailing interest rates, how much you make in relation to how much debt you have will dictate how large a mortgage you will qualify for. Debt can trip up many would-be homebuyers, even those who make a good salary and have money for a down payment. The amount of money you will qualify to borrow is based on your total debt in relation to your total income. Generally speaking, your total monthly debt, including your monthly housing costs (mortgage payment, taxes, and condo fees if you are buying a condo) should not typically exceed 45 percent of your gross monthly income. For example, if you make $10,000 a month ($120,000 a year), all your debt together should add up to no more than $4,500 a month. From the $4,500 per month, subtract car loans, student loans, credit card payments and other debt. What is left is how much you will be able to afford for your monthly mortgage payment.
If you need to take out (PMI) Private Mortgage Insurance (usually required for borrowers who put down less than 20 percent of a home’s purchase price), your monthly debt, including housing costs, should typically add up to no more than 41 percent of your gross monthly income.
Lenders have a little leeway with these ratios, but in general, 45 percent debt-to-income will dictate how much you can borrow.