There are a few easy tricks to help you find the amount of mortgage you should take on. Because this method does not take into account many factors, you should be sure to consult with a qualified expert. Banks will generally not lend a person too much money, so for this reason it can be difficult to get into too much trouble. Problems generally occur when a person takes on more debt after they have received their mortgage loan. Another pitfall involves miscalculation another co-borrower's (wife, husband, etc) earning power. If your co-borrower encounters problems, you are both legally responsible for loan repayment. Borrowing power also depends on all persons involved.

Often a first time buyer's main concern is down payment and closing costs. The amount of savings accumulated will be a first time buyer's most important consideration. If you do not have the amount required, (usually 3-5% of the total loan amount) it is advisable to save for your down payment by putting an amount of money from your paycheck away into a savings account. Monies in your checking and savings accounts, mutual funds, stocks and bonds, the cash value of your life insurance policy, and gifts from parents or other relatives may all be suitable sources for a down payment. You may need to rent for several years before you are ready to buy your first home.

Putting less than 20 percent down often means you are required to purchase PMI (private mortgage insurance) for your home. This will add approximately 1% to your monthly payments and is added to the overall loan amount. In considering your down payment, this is an important consideration. There are also moving expenses and decorating and furnishing as well as any required repairs to the new home (if a resale home) that will need to be examined while considering your down payment amount. If you are considering other large purchases such as a new car, this should also be considered. Additionally, a mortgage lender will often wish to see a few months worth of mortgage payments over and above the down payment amount in reserve.

Beyond a simple down payment, you will be required to come up with closing costs. Closing costs are separated into what are called non-recurring closing costs and pre-paid items. Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. Pre-paids are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.

Beyond having the proper amount of funds for the down payment and closing costs are other factors. Earnings and credit are considered carefully. Lenders use existing guidelines to determine the size of loan you are eligible to receive. The amount you owe on existing debt is very important. Also, credit ratings are taken to mean quite a lot. Perhaps even more important than this is your earnings history. This is the amount of money you have earned over a consistent period of time.

Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The top or front ratio is a calculation of the borrowers monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowners association fees) as a percentage of monthly income. The back or bottom ratio includes housing costs as will as all other monthly debt.

A general rule of thumb is that you should not buy a home whose payment, taxes and income is greater than about 35% of your monthly gross (pre tax) income. This is called a housing expense ratio and is used by most mortgage lenders. The amount of money owed to various creditors for long term debt should be no more than 40 percent of your gross monthly income. This is known as the debt to income ratio.