Running The Numbers

Let’s assume you have good credit.  If you do, you can get a good picture of what you can borrow by using some very simple calculations. There are two steps or methods.  The first method determines the ideal payment as it relates to your income, the second takes into account other debt. Use the table below for both.

Income 1: $____
Income 2: $____
Income 3: $____

Credit Cards*: $____
Auto Loan(s): $____
Day Care**: $____
Student Loan(s): $____
Other Revolving Debt: $____

Method One

Multiply your monthly GROSS income by .28 or 28%. This number is the amount you would ideally put towards a monthly mortgage payment. Keep in mind this number would include principal, interest, taxes and insurance (PITI).

A(.28)= Ideal PITI

Method Two

Multiply your total monthly income by .35 or 35%.   This will determine an ideal debt service number.  Subtract from this number the sum of your monthly debt (B).  The difference between these two numbers is the amount of money you can devote to a monthly mortgage payment that includes principal, interest, taxes and insurance (PITI).

A(.35)-B= Ideal PITI

If this number is lower than that of step one, your other debts are diminishing your buying power.  Conversely, if you little to no debt, a lender may allow you to borrow more money and have you putting a larger percentage of your monthly income towards housing.

These are conservative numbers and in many cases a good credit score will allow your lender to push these limits. The more in-depth method two shows the importance of keeping debt down when looking to buy a home.

*Your lender will use the minimum payment amount due, you may want to use a more realistic number for a more accurate figures.
** Not all lenders will incorporate daycare as long-term or revolving debt. You may wish to in order to get the most accurate financial snapshot you can.