One of the most important questions first-time buyers face is calculating how much money they can actually afford to spend on their monthly mortgage payment.

While there is no easy answer, there is something called The 28% rule. That thinking is that you should spend about 28% of your gross monthly income on your mortgage.

But is this percentage right for everyone? (Short answer: no.) And what the heck is gross monthly income, anyway? (Gross income is what your paycheck says you bring in, as opposed to net income, which takes into consideration taxes, car payments, child support, and any other set monthly expenses.)

Here’s how it works:

Lenders like banks and mortgage companies typically look at your gross income when they decide how much you can afford to take out in a loan.

Using the 28% rule as an example, if your household brings in a total of $5,000 every month, multiply $5,000 by .28 to get a rough estimate of how much you can afford to spend a month. If your monthly income is $5,000, you should not spend more than $1,400 on your mortgage payment.

But that’s a little “big picture,” since lenders don’t just look at your gross income when they see if you qualify for a home mortgage loan. They calculate a debt-to-income ratio first.

So what’s a debt-to-income (DTI) ratio?

That’s how much of your monthly income goes toward debt and recurring expenses – like we mentioned above – car loans, VISA debt, back debts, child support, student loans, back taxes, and anything like that. Banks and mortgage companies use your DTI ratio to calculate how much you can realistically afford to pay each month.

So if you have a higher DTI ratio, you have more debt and are judged to be a riskier candidate for a mortgage. Lower DTI ratio means you are a better risk and may qualify for a lower interest rate.

Can you calculate your own DTI ratio?

Absolutely! Here’s how:

  • First, add up your fixed monthly expenses using minimum payments and fixed recurring expenses. For example, if you have $27,000 in student loans but you your monthly payment is $250 a month, then $250 is the number you use in your debt calculation. (No need to include variable expenses like utilities and groceries in your calculation.)
  • After you add up all debts, divide your monthly debts by your gross monthly income.
  • Then, multiply the result by 100 to get your DTI ratio.
  • If your DTI ratio is more than 40%, you wlll likely have trouble finding a mortgage loan.

What else gets considered by banks and mortgage companies?

Besides your income level and DTI ratio, lenders also look at your credit score. Naturally, the higher credit score — or larger down payment – the better.

Another way you can reduce your monthly mortgage payment is to set up a slightly longer mortgage repayment. For instance, a 15 year mortgage will cost you less per month than a 10 year mortgage.

Another good idea is to talk to the bank with whom you already have a track record established. For instance if you have a car loan with Chase Bank, talk to them about a mortgage loan. Or speak with a savings and loan company rather than a bank. Very often, their rates are slightly lower than bank rates.

It’s good to remember that every lender is a little different. So it’s always a good idea to shop around.