Your debt to income ratio is a very important factor in determining how much of a monthly mortgage payment you can afford.  The bank likes to see your debt-to-income ratio at about 45% or less.  Some programs allow you to go as high as 55% and some only allow you to go up to 39%.  But 45% is a safe estimate since most programs accept that. 

So, if you need your DTI to be about 45%, how much does that mean your monthly payment needs to be?  Take your gross monthly income and subtract your liability payments.  Your liabilities are things like, car loan payments, student loan payments, minimum credit card payments, personal loan payments.  Think of it as loans that you are paying back.  So things like utilities, gym memberships, cell phone service are things that you are utilizing and paying as you go, so those you don’t count.  After you subtract your liabilities, multiply it by 45% and that is how much of a monthly mortgage payment (included taxes & insurance) that you can afford.

Example:

You and your spouse bring in together 6,000 a month.  Your liabilities are:

$250 car payment

$30 minimum credit card payment

$150 student loan payment

So subtract your liabilities from your gross monthly income and you get $5,570.  Then multiply $5,570 by 45% and you get $2506.50.  And that is how much of a mortgage payment you can afford. 

Remember that payment of $2506.50 includes property taxes and homeowners insurance.  Those payments can vary but for general purposes, multiply your desired sales price by 1.25% and divide by twelve for your monthly taxes and multiply your sales price by .2% to get your monthly insurance.  Example:

$300,000 house

300,000 x 1.25% / 12 = $312.50

300,000 x .2% / 12 = $50

So your taxes & insurance monthly payment would be $362.50.  Subtract that from 2,506.50 and you get $2,144.  That means your mortgage payment should be around $2,144. 

Wow, I don’t know if anyone really cares about that, but there you go…