The most important question is not how much house you can qualify for,
but what payment you can comfortably afford.
Important points on qualifying covered below:
Because the maximum debt-to-income ratios lenders use to qualify borrowers are aggressive, you may qualify for a mortgage that gives you an uncomfortably high payment. Decide on a monthly housing expense that fits your lifestyle, including mortgage payment, property taxes and homeowner’s insurance and/or association dues, and factor in the tax advantages of buying. Then work with your lender to determine what size mortgage—and what price home—you qualify for.
The maximum payment for which you qualify is derived from the debt-to-income ratio allowed on the loan program you have chosen. If the lender will not permit a debt-to-income ratio higher than 43%, then the monthly payments for your housing (mortgage + insurance/HOA + property tax), revolving debt, and installment debt cannot exceed 43% of your gross (pre-tax) monthly income. The allowable debt-to-income ratio can vary between lenders and loan programs. You may find that you can qualify for a far bigger mortgage from one lender than from another, or that your maximum allowable purchase price from a lender is very different than that from an online mortgage calculator.
A borrower who has good credit, can document income, and is putting down 20% or more, will generally be allowed a debt-to-income (DTI) ratio of 42% to 45%, depending on lender guidelines for the loan program that you have chosen; however, among different lenders and loan programs the range may vary from 38% to as high as 50%. Again, you may qualify for a purchase price that gives you a monthly payment that is more than you feel you can comfortably afford. With a 50% DTI ratio you may have very little left to spend beyond housing and basic necessities. Unless you expect your income to rise quickly, or have income that the lender is not using in the DTI calculation, having a high DTI ratio will probably mean dusting off your mom’s old tuna noodle casserole recipe – and that’s for the nights you’re having guests.
Two important variables in qualifying are interest rate and loan type: the interest rate may vary among different lenders, and can change quickly in a volatile market. You may qualify for a larger mortgage and be able to buy a more expensive home if you use an adjustable rate mortgage or ARM, one with an interest rate fixed for 5, 7, or 10 years. The lower the interest rate used to qualify you, the higher the purchase price you will be approved for. You may choose to pay one or more points on a loan because you will be qualified at the lower rate that the points buy. However, this increases the closing costs, as one point is equal to 1% of the loan amount.
If you are purchasing a property that you will live in that also has rental income, a duplex for example, the qualifying calculations are more complex. Because rental income affects qualifying, and will be different for every property, you cannot be preapproved for a specific price in this situation. You will have to check with your lender on each property you are considering making an offer on to find out if you qualify for that specific property based on the combination of it’s price and rental income.