Lenders have pre-qualification boiled down to a basic equation, usually based on a percentage of your income. Lenders use a debt-to-income ratio of 36 percent, according to Lending Tree's article, "How much can you afford to borrow." The article recommends that you should spend no more that 28 percent of your income on housing, including taxes and insurance. If your non-housing credit obligations use a significant percentage of your debt ceiling, it will reduce the size of the mortgage loan you can qualify for and may also make the terms you are offered much less favorable.
Total your monthly credit expenses, including minimum payment on credit cards, car payments and student loans. Child support, unless it is due to be stopped soon, is counted in this category, but your current mortgage or rent is not.
Add up your income from all sources, including earned income, interest and investment income, rents paid to you and alimony and child support. Income is, literally, any money coming into the household. If your income varies from month to month, then tally up all income from the past year, or just take the total from your last tax return, and divide by 12 to get a monthly average.
Multiply your monthly income by .36 to learn what the lender will see as your debt ceiling. Assuming a monthly income of $3,500: $3,500 times .36 equals $1,260.
Subtract your total current debt from the debt ceiling to get the monthly mortgage amount you could be qualified for. For example, with a monthly debt of $450, not including other monthly bills like utilities: $1,260 minus $450 equals a maximum housing cost of $810. This number would include property taxes and insurance.
Go to an online calculator, such as the one at Lending Tree in "Resources" and enter income, down payment, credit obligations, expected housing expenses and proposed interest rate to see an estimate of the maximum mortgage loan you could get. Continuing with our example, and assuming a down payment of $15,000, annual homeowners' insurance and taxes of $900, and interest at 4 percent over 30 years, our hypothetical buyer could qualify for a maximum home price $168,954 and a mortgage payment of $735 per month. A lower interest rate would allow her to buy a more expensive home and a higher interest rate would do the opposite.
Pay down non-housing credit obligations if they are too high a percentage of your debt ceiling. This will increase the amount available for a mortgage payment and probably get you more favorable terms, both of which will increase the amount of money you can borrow to buy a house.
Billie Jo Jannen is a politics and lifestyle columnist in rural San Diego County and a senior copy editor for Demand Media. Her writing and editing career spans 23 years, and she specializes in border and environmental affairs. Jannen's eclectic education includes engineering and horticulture, and she represents the Rural Economic Action League in regional economic development planning.