How do those online mortgage calculators work?

For a mortgage you already have? Or for a house you are looking to buy?

They are all predetermined ratios that were calculated as the industry standard. Generally when they say 25-29% PTI and 37-41% DTI they are already factoring in how much you should be spending on other monthly (non credit debt) bills. They have supposedly already factored you bills in.

However I find those ratios to be too high. Our PTI on a recently opened mortgage is 15% (DTI about 23%), and I will not feel all that comfortable until we start making better money next year.

I'm not sure I understand what you're saying. Are you saying that the monthly payment it says I can afford will have to also include groceries etc.? Because that's definitely not accurate.

No. It's based on percentages. Your gross income is used. They upper end of what they say a person can afford when it comes to housing (PITI) is roughly 26%. The amount of overall debt you can handle is roughly 36% (including PITI). The other roughly 64% is assumed to go to income and payroll taxes, living expenses, retirement accounts, healthcare, and discretionary. It's imperfect, but it's simple to calculate and widely deplorable. It's one of those rules of thumbs in personal finance that I feel is too generous.

So in a low rate environment you can "afford" a larger or more costly home because the notes are smaller relative to the balance of the mortgage but the same relative to your income. People get in trouble with ARMs and ballons because the don't understand changing rate environments. Other rules of thumb from finance that I feel are too generous: you can "afford" a home 2-3x gross annual salary and a car 0.5x gross annual salary. These rules assume that they are mutually exlusive. Personal finance does not exist in a vacuum. It is not static.

Ok good, so it already assumes based on my income and debt that I have taken out some 'industry average' for living expenses and then said, here's what you can afford?