FORMULA: How much house can I afford?
You will need exact numbers, so if you do not already have a copy of your credit report, you can get one free at www.gofreecredit.com.com. If you still can't figure this out by the formula below, please see our example.
(Income On Paper for Past 2 years / 24) * (.5) = 50% Of Your Monthly Income Averaged Over 24 months
Note that 50% is a number most lenders use for their debt to income ratio formula. It could be higher or lower depending on the lender and their guidelines for that loan program.
(50% Monthly Income) - (Total Minimum Monthly Payments On Your Credit Report) = Available Cash
In the above formula, "Available Cash" is the most your mortgage payment can be including tax and homeowners insurance. Do not forget to figure out what your monthly payment for taxes and insurance will be. To figure this out, just divide the annual tax payment due by 12 and the annual insurance premium by 12.
Now take the number you got for Available Cash and compare with the figures you are finding with a mortgage calculator. Your final payment with taxes and insurance must be less than or equal to your Available Cash number. The reason you must use the figures in the mortgage calculator is because the interest rate, down payment, and final loan amount will effect what your final mortgage payment actually is.
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