While these are some guidelines on what lenders will require, the final answer of what you can afford rests with you. The reason for this is that every borrower is different, and each one has a different set of financial circumstances. One borrower may have additional income that is not being considered by his/her spouse. Another borrow may have a high level of expenses that are not considered by a lender (like education or utility expenses).

But from a lenders perspective, assuming all income is accounted for, and there are no major expenses outside of what is shown on your credit report, here is how they will look at it. Your total housing expense will include a mortgage payment, property taxes, home insurance, mortgage insurance (if applicable), and HOA dues (if applicable). Add up the monthly equivalent of all those related items. That amount, divided by your “gross” income is what we call your housing ratio. Different loan products will require different housing ratios. For sake of simplicity, let’s call it 40% of your income.