Buying a house is a major investment. So how do you figure out what amount you can easily carry? Most lenders use the 28/36 Ration. It is made up of two components: The Housing Ratio - 28% and The Debt Ratio 36%.

28% -- The Housing Ratio
The Fannie Mae guidelines suggests that a person should spend no more than 28% of monthly income for housing payments. The 28% Housing Ratio is calculated by taking 28% of the borrower's gross monthly income (e.g. $40,000 a year = $3333 per month X 28% = $933).

This housing payment includes Principal on the loan, Interest, Taxes and hazard Insurance (PITI).

36% -- The Debt Ratio
The Debt Ratio is 36% of total monthly income. The Debt Ratio includes the mortgage payment plus all your monthly payments being made on other debts. This figure is derived thus: Total debts ? Monthly income = Debt Ratio. The figure should be 36% or less; it should be greater. If your Debt Ratio comes to a figure greater than 36%, then the lender takes into consideration various factors such as: Excellent credit, assets and savings. There are other Debt Ratios available (33/38 or 45/45), but these usually have higher down payments and various other restrictions.

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