Chapter 3: Prepare for Your Payment

To know the amount of loan you qualify for, the lender will look at two different ratios. The first ratio is calculated by dividing the total monthly mortgage payment by the total monthly gross income of everyone who will be on the note (the mortgage). Traditionally, the ratio was around 33 percent for first-time homebuyers, but many lenders have become much more flexible, and some may accept a 40 percent or higher ratio.

The second ratio factors in any long-term debt that you may have. Long-term debt is defined as any loan outstanding with more than ten months remaining before payoff, plus your monthly outstanding debt. Simply add these debts to the monthly mortgage payment and again divide by the total monthly gross income. Depending on the lender and your unique circumstances, the ratio can be up to 50 percent.

Use the Mortgage Worksheet to find out how much home you can afford!

Taxes and Homeownership
When you first calculate the amount that a mortgage payment can be, the figures can seem discouraging. However, the significant tax benefits of homeownership can increase your net income and offset the cost of the mortgage payment. Mortgage interest and property taxes are deductible on your income taxes.

Tax benefit example: The value of the home you buy is $150,000. You are able to put $7,500 down, and borrow the remaining $142,500. Your monthly PITI is $1,371, but approximately $950 of that is interest and taxes – which you can deduct from your income taxes ($950 multiplied by 12 equals the annual mortgage deduction of $11,400).

If your adjusted gross income was $60,000 last year, your adjusted gross income this year will be $48,600:

Assuming you are in the 25% tax bracket, your tax savings will be approximately 25% of your total mortgage deduction (interest plus taxes).

Therefore, instead of paying a PITI of $1,371, your actual monthly housing cost would be $1,133.50. ($1,371- $237.50 = $1,133.50)