Use mortgage calculators to know how much you can pay monthly

I have looked at mortgage calculators to determine what I can afford, but I am still not sure how much monthly mortgage payment I will feel comfortable with. What else can I do?

First, using the amount of your own income and debts, calculate the debt-to-income ratio, the Federal Housing Authority's recommendations, and the housing expense ratio. You will come up with a range of mortgage payments that are within your means.Take the high end of that range and run through the mortgage calculators at FreddieMac.com, BankRate.com, or Hud.gov to see what your monthly mortgage payments would be.

Now spend the next two months setting aside that payment amount for housing. Of course, you will need to pay your current rent out of the amount set aside. After you take out your current rent, put any excess into savings. If you can live for a couple of months with that increased amount going to housing, you know you can afford a house in that price range. This is also a great way to accumulate a down payment.

What are the calculations that lenders use to determine the maximum loan a person can afford?

Mortgage lenders use a variety of calculations. Even the lenders who use the same type of calculation may interpret the results differently. Here are some of the most popular calculations.

Lenders look at the total of your debts and compare that number to your gross salary (salary before taxes are taken out). Mortgage lenders do not want the borrower to carry debts (including the mortgage payment) larger than 30–40% of your total gross salary. This is your debt-to-income ratio. Debts include credit card debts, auto loans, student loans, spousal support, child support, and housing expense. Housing expense is the mortgage payment that includes homeowners' insurance premium, real estate taxes, and mortgage insurance premium.

Lenders may follow the Federal Housing Authority's (FHA) recommendations that a person's mortgage payment should be no more than 29% of his or her gross income. The other part of the FHA recommendation is that the mortgage payment plus a person's other expenses (long-term debts) should total no more than 41% of his or her gross income. Some lenders use what is called a housing expense ratio. Using this calculation, a person's monthly mortgage payment should be less than or equal to one quarter of his or her monthly gross income. Again, gross income is before taxes.

Here is where we insert a reality check - these calculations are not strictly followed even in the current buyer's market. Whatever math the lender does, lenders also scrutinize a person's credit history and credit score. In addition, the lender looks at the amount of down payment, and closing costs for a particular property.

Is there a calculation that will help me decide what I can afford in another city?

On the website CNNMoney.com there is a salary comparison calculator that allows you to see how far your salary will go in another city or state. The calculator is based on costs for housing, utilities, transportation, and health care.

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