How to Calculate Mortgage Eligibility

Eligibility comes down to how much you make each month and how much you pay out.

Eligibility comes down to how much you make each month and how much you pay out.

Your mortgage eligibility refers to the maximum amount you can borrow from a lender for your home purchase. Before you start the house hunt, it is best to find out how much you are eligible for, the approximate payment and the terms so you know what you are getting into. Just because you are approved up to a certain amount doesn’t mean you need to borrow that much. To determine your eligibility, use what lenders use to calculate how much you can afford: your front-end and back-end debt-to-income ratios.

Gather income statements, Forms W-2 and the most recent income tax return for yourself and anyone else who will be on the loan application. Combine the monthly gross income -- the income before taxes -- including alimony and child support.

Determine how much down payment you can afford. Lenders can require 3.5 percent to 20 percent down. If unsure, ask your lender how much down payment it requires.

Identify the front-end and back-end debt-to-income ratio ceilings your lender uses to determine if you can afford the loan for which you are applying. Lenders typically allow a front-end ratio as high as 28 percent and a back-end ratio as high as 36 percent.

Determine your front-end ratio by dividing your monthly housing costs -- including mortgage insurance, property tax, escrow and insurance -- by your gross monthly income. Assume your monthly housing costs will total $1,500 and you and your spouse together earn $6,000 per month. Your front-end debt-to-income ratio is 25.

Arrive at your back-end ratio by dividing your total monthly debt obligations -- including housing costs and minimum payments for credit card accounts, auto loans, personal loans and student loans -- by your gross monthly income. Don't include utility bills or a current rent/mortgage payment -- unless it will be retained after you get your new home. Assume the total of your monthly debts is $2,100. Divide 2,100 by 6,000 to find that your back-end debt-to-income ratio is 35.

Compare your back-end and front-end ratios to the ceilings provided by the lender. With ceilings of 28 percent and 36 percent, respectively, the ratios identified in the calculations would be acceptable.

Figure your maximum monthly payment for housing expenses by multiplying your gross monthly income by 28 percent or 0.28. If your gross monthly income is $6,000, the payment cannot exceed $1,400.

Calculate your maximum total for all expenses by multiplying your gross monthly income by 36 percent or 0.36. With gross monthly income of $6,000, the total of all monthly debts cannot exceed $2,160.

Items you will need

  • Income statements
  • Forms W-2
  • Calculator
 

About the Author

Shailynn Krow began writing professionally in 2002. She has contributed articles on food, weddings, travel, human resources/management and parenting to numerous online and offline publications. Krow holds a Bachelor of Science in psychology from the University of California, Los Angeles and an Associate of Science in pastry arts from the International Culinary Institute of America.

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