First, determine your gross monthly income. This will include any regular and recurring income that you can document. You can also use unearned sources of income such as alimony or lottery payoffs. And if you own income-producing assets such as real estate or stocks, the income from those can be estimated and used in this calculation.
Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. Use the minimum monthly payment for calculating monthly credit debt obligations. You don’t have to consider a debt at all if it is scheduled to be paid off in less than six months.
Although every lender has slightly different formulas, here is a rough idea of how they look at the numbers. Typically, your monthly housing expense, including monthly payments for taxes and insurance, should not exceed about 28 percent of your gross monthly income. If you don’t know what your tax and insurance expense will be, you can estimate that about 15% of your payment will go toward this expense. The remainder can be used for principal and interest repayment.
Your proposed monthly housing expense and your total monthly debt combined cannot exceed about 36% of your gross monthly income. If it does, your application may exceed the lender’s underwriting guidelines and your loan may not be approved.