Financial Ratios
How do lenders assess how much I can afford per month?
Generally, lenders calculate that the homebuyer shouldn't pay more than 30 to 32% of gross income for principal, interest, taxes, and insurance (PITI), or 40 to 42% for both PITI and monthly debts combined.
The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.
Two lender formulas:
| 30 to 32% formula | Total monthly housing costs (PITI) = 30 to 32% (or less) gross monthly income |
| 40 to 42% formula | PITI + all monthly debts = 40 to 42% (or less) gross monthly income |
