Determining your monthly income is an important first step. This includes regular & recurring income that can be documented. If you can not document or prove the income you wish to report or if it does not come up on a tax return you can not use it for qualifying purposes. You can use sources of income that are considered unearned such as gambling (legal) winnings, settlements, and alimony. If you own property or other income producing assets like stocks (dividends), the income from these things can be used in an estimated format.

You will need to calculate monthly debt loads including all debt obligations such as credit cards and loans as well as other monthly obligations such as owed monies (child support / alimony) and re-occurring debt. Revolving debts such as credit cards use a minimum monthly payment system for this calculation. Installments use current monthly payments to calculate your debt loads. You do not need to consider a debt if it is scheduled for payoff in a time period of less than 6 months. Taken as a whole it is considered a monthly debt service.

The most important thing to understand about this is that mortgage loan officers do not want to over burden anyone. They want you to have the ability to repay what you owe. Different lenders have different formulas. The following is a rough idea how to look at the numbers

If your monthly expenses, including payments for insurance and taxes exceeds 28% of your gross monthly income, you should expect problems. An easy way to calculate extra home expenses such as taxes, insurance and other items is to consider about 12% of your income to go towards these things. The rest can be used for other things such as interest and principal, that is, the amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Additionally, Total housing expenses (monthly) and total debt service (monthly) combined should generally be less than 40% of your gross monthly income. The lender's underwriting requirements may be exceeded and the application denied if these amounts are exceeded.

Every situation is different. It is not uncommon to encounter flexibility in the 25% and 40% general guidelines. If you are able to purchase a home by borrowing less than 80% percent of the value of the home by putting down a large cash down payment, qualifying rations are much different and less critical. For example if Paul Allen, or Steve Forbes, or your rich relative is willing to co-sign the loan, any lender will definitely be less caring about guidelines discussed here. These guidelines are simply a general rule of thumb meant to educate you on the mindset of mortgage lenders.