Mortgage lenders have various formulae and rules of thumb for calculating how much they are willing to lend.

First of all, they want your mortgage payment to be less than 28% of your monthly gross income. That's called the Front Ratio.

They'll determine your gross income from your paystubs, business records and tax returns.

Your mortgage of course will typically consist of the monthly principal payment on your loan and the interest. However, you may also have to pay additional amounts for real property taxes and insurance. These typically go into an escrow account. Some loans provide for interest only payments, but these types of loans are starting to be disfavored by lenders.

The lender wants to guarantee that you pay those property taxes because local governments have the right to seize real estate to recover unpaid property taxes. The government's right to be paid property taxes overrides the lender's ownership rights.

Also, the lender has a vested interest in making sure your house is insured. They don't want you to walk away from your obligation to pay them because the house was burned up in a fire.

If you pay a down payment that's less than 20% of the value of the house you're buying, you may be charged a fee for Private Mortgage Insurance (PMI). This protects the lenders in case you fail to make your payments. PMI runs around 1/2% of the total loan balance per year. You will pay 1/12 of this each month in your total mortgage payment.

The underwriters who analyze the risks of lending money also use what's called the Debt to Income ratio to evaluate you. This is simply the monthly total of the minimum payments you must pay on all your current debts (credit cards, car note, student loans etc) divided by the amount of your monthly gross income.

Obviously, if you have so much debt that you can now barely make the minimum payments, you're not a good prospect for a mortgage.

Lenders typically don't want your total debt payments (including the mortgage payment) to exceed 36% of your total monthly income. That's called the Back Ratio or total expense ratio.

Another formula used by lenders is the Loan to Value Ratio. This is the mortgage principal you want to borrow divided by the current market value of the house. Some FHA or VA government financed loans may let you qualify by putting down only a few percentage points, but the primary mortgage market wants you to put down 10% or 20%.

The higher the down payment you make, the more likely you are to get approved. Partly because your monthly payment will be smaller and partly because lenders know that the more money you have invested in a house, the less likely it is they'll ever have to foreclose. This reduces their risk, and they reward you by lowering the interest and points you'll have to pay. And as mentioned earlier, if you put down 20% or more you won't have to pay PMI. Lenders have learned that of people who put down 20% or more, only 2% ever default on the mortgage.

Lenders will also look at your FICO credit score, created by the Fair Isaac Company. Possible FICO scores range from 300 to 850. The Federal Home Loan Mortgage Company (better known as Freddie Mac) has found that people with credit scores of 660 or better are highly unlikely to default. A score of under 620 makes it more difficult to get approved for a mortgage loan.

Of course lenders also check the details of your credit record from one of the three credit history companies: Equifax, Experian and TransUnion. Lenders especially look for very late payments, bankruptcy and judgments. If you have any of those still on your credit record, it's unlikely you'll be approved.

Knowing these rules of thumb can help you take control of your finances, so when you want to buy a new house, you know you can qualify for the mortgage you need.