Buying a new home is a big decision that involves a whole lot of smaller ones. Many people focus on the number of bedrooms or the quality of the kitchen appliances as they contemplate where they want to live.

When you're buying a home, mortgage lenders don't look just at your income, assets, and the down payment you have. They look at all of your liabilities and obligations as well, including auto loans, credit card debt, child support, potential property taxes and insurance, and your overall credit rating.

Before you even start looking at properties, the first step in the process should be calculating exactly how much you can afford to pay on your mortgage. Mortgage lenders will use your gross income to make this calculation, but it’s good to know exactly how they decide how much mortgage debt you can take on.

Know Your Debt to Income Ratio

Your debt to income ratio (DTI) is another way of calculating how much house you can afford and is a number your lender will take into consideration when evaluating your loan application.

To calculate your DTI, add up all your continuing monthly expenses, then divide that number by your MGI. Knowing this number is a good way for you to identify areas where you can reduce debt, such as paying down credit card balances.

Determine Your Down Payment

The absolute minimum down payment you’ll need to purchase a home is 3% to 5% if you’re applying for a conventional loan and 3.5% if it’s an FHA loan. However, the ideal down payment is 20% of the home’s value. Less than this amount and you will have to add what is called private mortgage insurance (PMI).

Improve Credit Score

Your credit score is an important component in your home buying journey. A higher credit score will qualify you for lower interest rates, so your first step is to check what your score is and see if there are ways of improving it. Check your score, and if it is close to a higher “bucket” see if you can improve it enough to qualify for a lower interest rate.

Consider How to Best Allocate Your Assets

You have a certain amount of money to spend on a new home purchase, so figuring out how best to use that money is important.

Consider all financing options and how they will affect your mortgage over the long run and choose the one that gives you the biggest savings over time.

Once you’ve made all your financial calculations, you can start to search for properties. Experts recommend limiting the listings you look at to those that fit your preferred budget and let your real estate agent know you aren’t interested in seeing properties above your price range. This way you can avoid the temptation of falling in love with something you may not be able to comfortably afford.