Front-End Ratio

• Your front-end ratio determines how much pretax income is available for payment towards a mortgage. Your front-end ratio is based on the total of your principal, interest, insurance and taxes on the property. To calculate the maximum housing expense you can afford, multiply your annual salary by .28 percent, then divide it by twelve months. The result is the amount of mortgage and related costs you can afford.
  
  

Back-End Ratio

• The sum of your monthly debt of credit cards, car payments and other debts you may have should not exceed 36 percent of your gross monthly income. This is called the back-end, or debt-to-income ratio. To calculate this ratio, multiply your annual salary by 0.36 and then divide it by twelve months. If the mortgage you have in mind exceeds that number, you may not be able to afford it.
  
  

Down Payment

• Another factor to take into consideration in determining the mortgage amount you can afford is how much you have for a down payment. Lenders could require 10 to 20 percent of the sale price as down payment. The more you are able to put down, the more manageable your front-end and back-end ratios. As well, by maximizing your down payment, a lender may not need to put as much onus on your credit history to approve your loan.
  
  

Credit History

• In addition to front-end ratio and back-end ratio, your credit score also determines your allowable mortgage and rate. If your credit rating is good, you can obtain a lower interest rate on a higher valued home. A strong credit score may qualify you for a 30 year fixed rate at 4.7 percent while on the other end of the credit scale, poor credit could raise your rate to 6.3 percent. To get your credit score contact Equifax, Experian or TransUnion.