Banks and other financial institutions that issue mortgages do not want to issue a mortgage that will not be able to be repaid. Rather than concerning themselves with the size of the total loan, lenders usually restrict how much people can borrow based on the monthly payment and the borrower's income. When interest rates are low, the total amount of the loan will be higher. When rates are higher, the total loan amount will be lower.
Consult your pay stub to find your pretax monthly income. Lenders base your maximum monthly payment on your pretax income.
Multiply your pretax income by the lender's front-end ratio limit. The front-end ratio measures the percentage of your income the mortgage can take up. Most lenders limit your front-end ratio to about 28 percent. For example, if your pretax income equals $3,500, you would multiply $3,500 by 0.28 to get $980.
Multiply your pretax income by the lender's back-end ratio limit. The back-end ratio measures the percentage of your income the mortgage and your other debt payments can take up. Most lenders limit your back-end ratio to between 33 and 36 percent. For example, if your pretax income equals $3,500, you would multiply $3,500 by 0.33 to get $1,155.
Subtract any other debt obligations you have from the back-end ratio limit. For this example, if you have a car payment of $400 per month, you would subtract $400 from $1,155 to get $755.
Select the lessor of the front-end ratio and back-end ratio after other debts have been accounted for to use as the maximum mortgage monthly payment. In this example, since $755 is less than $1,155, the lender would limit your mortgage to one that has a monthly payment of $755 or less.