Lenders are primarily concerned with a potential borrowers willingness and ability to repay a mortgage loan.
By going through the credit verification process, lenders can easily see a potential borrowers willingness to repay loans. That is, do they pay their bills on time? How many times have they been late? etc.
For lenders to determine the ability of a potential borrower to repay their mortgage note, debt to Income ratios are used – "Front end and back end ratios" as they are called in the mortgage world. These ratios are the key to determining how much "house payment" a borrower can realistically handle on a month-to-month basis.
Debt to Income Ratios simply compare a potential borrowers monthly payment obligations against gross monthly income.
Front end Ratios
This ratio will determine your maximum housing only, that is, your maximum mortgage payment consisting of principal, interest, tax and insurance. Typically lenders do not want this to exceed 28% of your gross monthly income.
FRONT END RATIO: Annual salary $ 40,000 / 12 (months) = $ 3,333 x 28% = $ 933
So in this example, the borrowers maximum house payment per month would be $ 933.
Back End Ratio
This ratio is how much of your income can go toward all monthly obligations. That is PITI, car payments, revolving credit card debt, any monthly medical bills etc … Typically the maximum is 36%.
BACK END RATIO: Annual salary $ 40,000 / 12 (months) = $ 3,333 x 36% = $ 1200
Why not use a good online mortgage calculator to get a good idea of what you can afford? It will at least get you started if you have no idea what you can afford; there is no need to guess anymore. See the link at the bottom and visit an easy to use mortgage website with many useful calculators.