Many first time homebuyers start looking for a house with no real idea of how much home they can actually afford. If you’re looking for your first home loan, take a few minutes to consider the factors involved in determining the size of your mortgage loan.

Housing Payment to Income Ratio

Most lenders do not want your housing payment to take up more than 28% of your gross monthly income. A few lenders will push the amount up to 31%, but most will not go any higher than that. You can reduce the monthly mortgage payment by putting up a larger down payment and paying more points at the time of closing to get your interest rate down.

Debt to Income Ratio

Most lenders insist that a borrower’s total debt to income ratio be no higher than 36%. In the past, a few lenders would allow borrowers to carry a debt to income ratio of 40% or more, but in light of the recent foreclosure crisis, banks are tightening their standard on the mortgage loan. You can improve your debt to income ratio by paying off as many debts as you can. The more outstanding debt you can pay off–credit cards, student loans, medical bills, car loans–the more you’ll be able to borrow when it comes time to finance the purchase of your home.

Rule of Thumb

If you are not sinking in debt and if your credit score is decent, you will probably be able to borrow 2.5 to 3 times the amount of your gross annual salary. For instance, if you make $50,000 per year, it’s safe to guess that you will be able to borrow $125,000 to $150,000 for your home loan. If you have little or no other debt, and if you can make a down payment of 20% of the home’s value, you may be able to convince a lender to give you a mortgage worth up to 4 times your gross annual salary.

Use a Mortgage Calculator

Before actually approaching a lender to find out how much money you might qualify to borrow, use a home mortgage calculator, easily found online, and plug in the numbers. The result will give you an idea of the maximum amount you can borrow.

Let Common Sense Prevail

The lender’s guidelines and the mortgage calculator provide an educated guess as to the maximum amount of home you can afford, but if the numbers seem large and intimidating, you’re under no obligation to take the largest home loan available. It’s better to be in a smaller home where you’re comfortably in control of the payments than it is to be in a mansion where you spend each month agonizing about how the mortgage will be paid.