As we’ve seen recently in the news, it’s easy for people to get into more home than they can afford. House hunting is exciting after all. You take a look around and fall in love with the elegant home with a large yard and the white picket fence. The only problem is it turns out the house is just slightly of reach of your budget.

In order to get this house you end up looking at some more innovative ways to finance the property. The problem is that you should pick the property based on your budget not the other way around. How do you determine how much you qualify for and how do lenders go through the process of determining how much you can borrow?

Lenders go through several steps to determine what range is acceptable to lend you for a home. One area where they look is determining your debt to income (DTI) ratio. The general acceptable DTI range is 40% to 45%. Determining your DTI is pretty simple. First, you add your new house payment, auto loans, student loans, and credit card payments and total them up. Then you compare this amount and determine what percentage of your income is to your debt payments.

For example, let’s say that a couple makes $5,000 a month (gross). Take the $5,000 and take it times .45 (45%). This equals $2,250. This figure is the generally accepted maximum for total debt expenditure based on income.

Now let’s say the couple has a $100 a month student loan payment and $500 a month in credit card payments. This leaves $1,650 for motgage payment, property taxes, and insurance. Let’s subtract $250 a month for the taxes and insurance. This leaves us with $1,400 which allows us to purchase approximately a $210,000 home at 7% over 30 years.

Remember that you don’t have to be at a 45% debt ratio, you can certainly be at less. The important thing to remember when shopping for property is to not exceed the 45% DTI ratio.