Debt-to-Income Ratio

• Mortgage lenders use what is called a debt-to-income ratio to determine how much of a monthly mortgage payment they think you can afford. A standard debt-to-income ratio is 28 percent of your gross income and 36 percent of gross income minus your total debts. For example, if your household monthly income is $5,000, then you should be able to get a mortgage with a monthly payment of up to $1,400. However, if you have lots of other debts, such as credit card balances and student loans, this amount might be lower.
  
  

Other Factors

• Because mortgage lenders focus on what you can afford monthly rather than the overall size of your mortgage, there are other factors that affect how much you can borrow. Lower interest rates, for example, lower the interest costs of the loan, leading to lower monthly payments. A $100,000 mortgage at 6 percent would leave you with a monthly principal and interest payment of around $600. Drop that rate to 5 percent, though, and you could borrow about $12,000 more and have the same payment. The term of the loan, the size of your down payment and whether or not it has a fixed or adjustable rate could all affect how much you can borrow.
  
  

Loan Limits

• Most mortgage lenders do not hold onto the mortgages they generate. Instead, they sell them to investors. By far, the largest buyers of mortgages are government-backed companies Fannie Mae and Freddie Mac. Both companies set a size limit on the mortgages they will purchase. For 2011, these limits are $417,000 for single-family mortgages originated in the continental United States and Puerto Rico. The limit is $625,500 for single-family mortgages in Alaska, Hawaii, Guam and the U.S Virgin Islands. Through Sept. 30, 2011, there is also a temporary ceiling of $729,750 for certain high-cost areas in the continental U.S.
  
  

Considerations

• Just because a bank determines you can afford a certain amount, that doesn't mean it's the best decision for you. Keep in mind your other financial obligations, such as child care expenses, utility bills and other costs that aren't figured into the mortgage equation. Also, keep in mind that in addition to your mortgage payment, you will be responsible for property taxes and the cost of homeowner's insurance. Many people add these amounts to their monthly payments, where they are held in an escrow account until needed. Finally, keep a handle on your credit score, which will play a large role in whether you get approved for a mortgage and whether or not you can get the best interest rate.