With you being self employed, the lender will require your complete 08 & 09 federal tax returns with all schedules to see what if anything you're writing off since this will effect your over all income. If 40K is you total net gross after write off, then all that needs to be considered is the rest of your and your wife's credit reporting debt (i.e. auto and student loans, credit cards, ect...)since this will be applied against your income as well. Afterwards, you then must take into account the home of interest's property taxes, home owners, and association fees if any. All of these play a major role in determining what your actual buying power is.
And don't forget your interest rate as well. Something that will be determined by your credit score, down payment, and loan program. For FHA and VA, if you credit score is less than 640, you may not be able to get financing now at all, unless you can find a lender/broker still able to do 620. If so, since the industry standard is now 640 or better, you will pay the premium in a higher interest rate and discount pts.
A 600 credit score is not a great score. Most FHA lenders want to see a minimum of 620 for a credit score. Even then, your mortgage product is not going to be a great mortgage product, it will just barely qualify you.
You might want to consider working on your credit rating first and getting the score up into the 700's this will provide you with access to a range of better mortgage products. Good luck!
The Credit Repair Expert
Let me know if you would like a list of homes in that price range and I will email them to you. You can see which ones you are interested in and we can go view them.
You will also need funds for closing costs, you can always ask the seller to pay them, sometimes they will, sometimes they won't.
Keller Williams Realty
70005 Mirage Cove Dr
Rancho Mirage, CA 92270