How much money you can borrow for a mortgage is dependent on how much you qualify for. There are several types of mortgages to choose from, and they all have different requirements. Credit score requirements have increased, and underwriting guidelines are tighter. Grab your pay stubs and two years of W2 wage statements, a calculator, and call your favorite mortgage broker to talk about qualifying.

Figure Out Your Gross Income

Multiply your hourly wage by 40 hours per week (most workers get 40 hours). An example of this: If your hourly wage is $15 per hour X 40 hours per week, your gross (i.e., income before taxes) is $600 per week. Take your weekly amount of $600 and multiply by 52 weeks in the year = $31,200 per year. If you get overtime, a history must have been established, and you should have received it last year. Take this year's total of overtime and add it to the gross income. Example: $31,200 plus $6,000 in overtime = $37,200, divided by 12 = $3,100 income per month. If you have other types of income, take proof to your broker; he will correctly calculate it and share the result with you. Follow this same method to calculate your spouse's income, then add the monthly amount to yours. Example: Yours is $3,100 per month, his is $2,500 per month, so the income total is $5,600 per month.

Calculate Debts

List all of the consumer debts that you pay each month. This includes car payments, minimum-only payments for all credit card debts, student-loan monthly payments, and any other monthly payments. Total them up. Car loan: $300, all credit card minimum-monthly payments: $110, student loan: $75. These equal $485 of payments per month.

What Is In a Payment?

Based on your gross monthly income ($5,600 per month as calculated), an FHA loan will allow up to 31 percent of your gross income to cover the total monthly house payment. The house payment plus all debts should not exceed 43 percent of the gross income. The house payment must cover the principal and interest payment, and must include monthly taxes, homeowners insurance, and monthly mortgage insurance premium as well. Calculate $5600 X .31 = $1,736, which represents the maximum payment for $5,600 of monthly income. This amount must cover all components of the payment, so we account for an estimated $1,800 (divided by 12 months) for homeowner's insurance = $150 per month. A yearly tax estimate of $2,400 divided by 12 months = $200. An explanation of the total payment is shown in "FHA Calculation" below.

FHA Calculation

Let's say you found a home for $220,000. FHA requires 3.5 percent as a down payment ($7,700), so the base loan would be $212,300. But FHA has a one-time mortgage insurance add-on of 1.75 percent (or $3,715.25), so the actual loan amount is $216,015.25. With a 30-year loan at 5-percent interest, the monthly payment would be $1,159.53. Including FHA's monthly add on of .55 percent, we must take the $216,000 (the odd small amount will be paid at the closing), multiply by .55 = $1,188, divided by 12 months = $99 per month. So, the payment of principal and interest of $1,159.53 plus $99 add-on for monthly mortgage insurance, plus $150 for homeowner's insurance, plus $200 for monthly taxes. This all adds up to $1,608.53 total payment. This payment plus $485 in consumer debts = $2,093.53 divided by $5,600 monthly income = 37.38 percent of debt ratio. This works for FHA for a $212,300 loan.

Conventional Calculations

Conventional lending is available. Conventional (i.e., Fannie Mae and Freddie Mac) requires at least a 10-percent down payment. Guidelines are tighter, and the debt ratios are not as liberal. Using the same income above, a sale price of $235,000 would require 10 percent down payment, so the loan would be $211.500. At 5 percent for 30 years, the principal and interest payment would be $1,135.37. Add back the taxes of $200 per month, plus monthly homeowner's insurance of $150. Mortgage insurance would be calculated at $211,500 X .65 = $114.60 divided by 12 months = $114.62. This all totals up to $1,599.99. Add the other monthly debts of $485 for a total of $2,984.99, then divide by $5,600 = 37-percent debt ratio. This would work for conventional lending as long as the credit scores are over 680 and the borrower has some reserves left in the back after he pays his down payment. He can borrow $211,500.

Calculators and Factors

Calculation tables for FHA and for conventional lending are shown in references below, as well as the factors per $1,000 in mortgage dollars at various interest rates and terms. Call your favorite mortgage broker with questions.

Source:

FHA Calculations for Mortgage

Mortgage Calculators For All Loans

Factors for Calculating Mortgage per $1,000.