28 Percent

• The 28 percent mortgage rule says that your monthly house payment should equal 28 percent or less of your gross monthly income. This rule is in place to help both financial institutions and individuals. Financial institutions are less willing to approve you for a mortgage loan that exceeds 28 percent of your gross monthly income, because that's a large portion of your income going to one payment. Banks believe paying more than 28 percent of your gross monthly income will result in more defaults. This should be seen as the maximum; aim for less than 28 percent to better accommodate your finances.
  
  

Debt-to-Income Ratio

• After -- or sometimes before -- financial institutions make sure that you're in line with the 28 percent rule, they begin looking at your debt-to-income ratio. The ratio is a percentage of your total fixed monthly debt in comparison to your gross income. It only takes into account minimum credit card payments, loans and rent or mortgage payments. Banks prefer to see a debt-to-income ratio of 36 percent or less, according to LendingTree.com. Anything higher than that and your chances of getting rejected for a loan increase dramatically. For an example of debt-to-income ratio, suppose you take home a salary of $3,500 gross each month and your credit card payments and loans total $600 per month. Your debt-to-income ratio is 17.1 percent. You could afford a monthly mortgage payment equal to 18.9 percent or less of your total gross monthly income.
  
  

Additional Expenses

• While the 28 percent rule and debt-to-income ratio serve as two reliable indicators of the house you can afford, they don't take into account additional expenses that may make affording an expensive house difficult. Groceries, daycare, future tuition and health care serve as a few examples of expenses that may make a large mortgage challenging. For example, a family of five may spend considerably more on daycare and groceries than a family of two or three.
  
  

Affording a More Expensive House

• If your desired house exceeds 28 percent of your gross monthly income or balloons your debt-to-income ratio, there are a few strategies you can employ to still afford the house. You can take out a longer-term loan, such as 30 years instead of 15 years. Doing so decreases your monthly payment, but increases the total interest you pay. You can pay down a larger down payment, decreasing the monthly payment. Lastly, you can look for a similar house in a different location. Where you purchase a house largely determines the price you must pay for the house. Buying a house in New York City, for example, will typically cost more than purchasing a similar house in a suburb of Pittsburgh.