How to determine how much home you can qualify for

[Brandon Stewart]

I have a few people interested in a house that I am advertising Rent to Own, and i'm having a little trouble pre-qualifying them. I'm trying to get an estimate on how much of a home they can afford based on their debt and income. Is there a formula that I can use to determine this? Let's say I have someone who makes $5000/m gross. Assuming the lenders debt to income ratio requirement is 40%, we have $2000 to work with. We pull their credit and it shows they have $550 in monthly debt. So available housing costs should be $1450. How do I calculate, based on this number, how much of a home they can buy?

Also, the house that I'm advertising is available on a 2 year lease. Would you all agree that 2 years is enough time to fix most of the common credit problems? If not, how long would you say most will need?

Also, what credit situations should I avoid? One of the ladies that filled out my application admitted she had been through foreclosure. If it happened yesterday, I know that's something I can't fix. However, if it happened 5 years ago, could I move forward with her?

I'm not looking for an exact answer, but rather a rule of thumb. I just need to have an idea of what I can and cannot fix.

This is my first house by the way.