How to Calculate Home Loan Eligibility

By Nicki Howell

Lenders have specific guidelines when approving borrowers for mortgages. The lender carefully evaluates the borrower's current debt obligations, gross income and other factors to determine how much she can afford to borrow. Understanding home eligibility requirements before starting a home search will help you determine how much you can afford.

Add up your gross annual income. For example, if you earn $50,000 before taxes and your spouse earns $30,000, your gross annual income would be $80,000. An easy way to find this figure is looking at the previous year's tax return.

Calculate the down payment amount. Most lenders require 20 percent down on a home. However, FHA loans, which are secured by the Federal Housing Administration, require only 3.5 percent down. The more funds you can afford to put down, the more expensive home you can purchase.

Add up your total monthly debt. Lenders use total debt when determining loan eligibility. Add up monthly debt obligations, such as student loans, credit card payments and auto loan payments.

Shop current interest rates. High-interest rates make home loans more expensive. Check out current interest rates with tools, such as Bankrate.com.

Estimate property taxes. Contact the county tax assessor's office and ask for the tax rate in your area. For example, if you want to purchase a home with an approximate value of $200,000 and the property tax rate is 0.005 percent, this would be $1,000 ($200,000 multiplied by .005 percent).

Calculate your home loan eligibility. Plug your annual income, down payment, monthly debt and mortgage payment into calculators, such as CNN Money's version (see Resources). This will tell you how much home you can qualify for based on your financial situation.

Borrowers with higher credit scores will have access to lower interest rates. Check out your credit score at Annual Credit Report (see Resources).

Private mortgage insurance (PMI) is charged if you put down less than 20 percent on a home. PMI is an insurance purchased by the borrower on behalf of the lender. The insurance protects the lender from borrower default. The cost for this insurance varies based on the amount financed with the lender.

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