You have decided you no longer want to pay money in rent. You are ready to look into buying your first home. You want your dream home and you want it now. But you don't know how much you can afford. You don't know how much money you need. Where do you start?

The question of how much you can afford is THE big question. When it comes to what most likely will be one of your biggest purchases you want to make sure you are doing the right thing.

So how much house can you afford?

To get a real clear picture you need to become familiar with what lenders call "debt-to-income ratios or "debt-ratios." AS WELL AS getting a basic understanding of the different types on mortgage loan products that do not have requirements using ratios as described below. (See our mortgage learning module "Loan Types" ).

The standard debt-to-income ratios are the proposed housing expense (referred to as the "front-end ratio" and the total debt-to-income (which includes the house payment plus all other monthly bills), or back-end ratio.

Calculate your mortgage payment.

Debt-to-income Ratios

Front-end Ratio

Maximum housing expense = annual salary x 0.28 / 12 (months)

Back-end Ratio

The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium association monthly fees. In general, your total monthly debt obligation should not exceed 36 % of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.

Maximum allowable debt-to-income ratio = annual salary x 0.36 / 12 (months)

What (how much) you can afford is, of course based on your total income, but there is more involved in the picture. Your employment history is a factor. How long have you been employed and how long in the same profession. Another consideration is your credit. Your credit rating  (score), commonly known as your FICO score, is the main factor in determining the mortgage type, how much money you will need to have for your down payment, as well as interest rate you will be able to get when you apply for a loan to buy your home.

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