When considering a home purchase, it's imperative to know your price range and how much a lender is willing to loan. Assuming you have steady income without excessive debt, good credit and a little savings, you're almost ready to peruse those real estate magazines. Counting the cost is wise, so get out that budget and let's tackle this together.

Calculating Housing-Payment-to-Income Ratio

Make a list of your total annual income, which includes your regular salary and any other income like bonuses or support payments, tips. This is your total gross annual income--divide this by 12 for your gross monthly income. Multiply your gross monthly income by the standard .28, and you'll have an idea of the maximum you can afford for a monthly mortgage payment. This calculation is known as a conservative housing payment-to-income ratio. The total housing payment should include PITI, or principal, interest, plus escrows of real estate taxes and homeowner's insurance.

Calculating Total Debt-to-Income Ratio

The other important calculation is the total debt-to-income ratio, which should not exceed 36 percent of your income. Make a list of all your expenses, or debt, including car loan payments, mortgage, credit cards, student loans and any other debts. Multiply your gross monthly income by .36 to make sure you are within the standard lending guidelines for maximum debt load. If not, it's not time to buy yet--pay off some debts and save some cash. You'll need plenty of it for your down payment and closing costs, any repairs or redecorating, plus savings and emergency expenses.

Now What?

There are plenty of mortgage affordability calculators online, but being in control of your financial condition and understanding how these calculators work gives you an advantage in choosing the best lender for your needs. When you're ready to shop for lenders, don't go with the fly-by-night companies that promise the moon. Stick with your own bank or the tried and true mortgage lenders who have been helping people become homeowners for decades.

Source:

GinnieMae: YourPath To Homeownership

FreddieMac: Calculators

DaveRamsey.com: How Much Home Can I Afford?

Resource:

HUD: Buying a Home

Refi-Home-Loan.com: How much home can I afford?

PBS.org: Individual borrowing lesson