Here's the formula banks use to determine how much mortgage you can afford.

It's essential to consider how much you can afford to pay before you look for a house. Considering affordability early on will save you time and money because you won't bid on unattainable houses or apply for loans that are out of your ballpark. It will be easier to get a loan and, if necessary, you'll be able to take creative steps toward improving your financial and credit profile.

How Much House Can You Afford?

As a broad generalization, most people can afford to purchase a house worth about three times their total (gross) annual income, assuming a 20% down payment and a moderate amount of other long-term debts, such as car or student loan payments. With no other debts, you can probably afford a house worth up to four or even five times your annual income.

Lenders have traditionally wanted you to make all monthly payments using no more than 28% to 44% of your monthly income. In other words, if your monthly income is $2,000, the lender would ordinarily want you to pay no more than $880 (.44 x $2,000) toward all your debts.

These traditions are, however, becoming less rigid -- now, if you have an excellent credit record, a lender might allow you to go more deeply into debt. Just how deep depends on the amount of your down payment, the interest rate on the type of mortgage you want, your credit history and score, the level of your long-term debts, and other factors.