Lenders use percentage rules-of-thumb to estimate the amount of a loan for which a prospective buyer will qualify. This estimation is then used to determine the loan amount that the lender will be willing to finance. This amount is also useful to homebuyers who wish to determine the price of the home for which they qualify for before they begin searching the market. In performing a pre-qualification of a buyer, the following equation implements a technique of choosing between the lower of two criteria:
Income adjusted for fixed expenses such as taxes and insurance
Income adjusted for fixed expenses and current debt obligations.