Determine the maximum house price you can realistically afford. Our Affordability Calculator uses the widely accepted 28/36 Debt-to-Income (DTI) ratios to estimate your maximum qualifying loan amount, factoring in your income, existing debt, down payment, and estimated property taxes and insurance.
Mortgage Affordability Calculator
Maximum Affordable Home Price:
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Mortgage Affordability Calculator Formula
The maximum affordable property value ($V_{max}$) is determined by the minimum of two DTI rules (28% Front-End DTI and 36% Back-End DTI). The formula is: $$ V_{max} = \frac{M_{max} + DP \times K}{K + T_{monthly}} $$
Where:
- $M_{max}$: Maximum Allowable Monthly Housing Payment (PITI).
- $DP$: Down Payment.
- $K$: Amortization Factor ($\frac{r(1+r)^n}{(1+r)^n – 1}$), which converts a Loan Amount ($L$) to a Monthly P&I Payment ($PI$).
- $T_{monthly}$: Monthly Tax & Insurance Rate (Total Annual Rate / 1200).
Formula Sources: Consumer Financial Protection Bureau (CFPB) – DTI Ratios | Investopedia – Mortgage Affordability
Variables Explained
- Annual Household Income: Your gross yearly income. This is the foundation for determining DTI.
- Monthly Debt Payments: Total of all non-housing monthly obligations (car payments, credit cards, student loans).
- Down Payment Amount: The cash amount you are contributing upfront.
- Estimated Annual Interest Rate: The rate used to calculate the principal and interest portion of the payment.
- Loan Term (Years): The length of time over which the loan will be repaid (e.g., 15, 20, or 30 years).
- Property Tax & Home Insurance Rate: Estimated annual percentages used to calculate the Taxes and Insurance (TI) portion of the PITI payment.
Related Calculators
- Monthly Mortgage Payment Calculator
- Loan Amortization Schedule
- Debt-to-Income (DTI) Ratio Checker
- Rent vs. Buy Analysis Tool
What is Mortgage Affordability?
Mortgage affordability is a financial assessment tool used to determine the maximum loan amount, and subsequently the maximum home price, that a borrower can qualify for and comfortably afford. Lenders primarily rely on two metrics to gauge this: the Front-End Debt-to-Income (DTI) ratio, which focuses only on housing costs (PITI), and the Back-End DTI ratio, which includes all monthly debts, including PITI.
The standard guideline, often referred to as the 28/36 rule, suggests that a borrower’s housing costs (PITI) should not exceed 28% of their gross monthly income, and their total debt obligations (including PITI) should not exceed 36% of their gross monthly income. This calculator determines the maximum loan amount that satisfies the stricter of these two constraints.
How to Calculate Mortgage Affordability (Example)
- Find Gross Monthly Income (GMI): Divide Annual Household Income by 12.
- Calculate Max PITI Payments: Determine the maximum allowed housing payment using the 28% and 36% rules. Use the lower of the two results.
- Calculate Amortization Factor (K): Use the interest rate and loan term to find the factor $K$.
- Determine Monthly T&I Rate: Sum the annual property tax and insurance rates and divide by 1200.
- Solve for Max Property Value: Plug all calculated values (including Down Payment) into the complex formula: $V_{max} = \frac{M_{max} + DP \times K}{K + T_{monthly}}$.
- Result: $V_{max}$ is the Maximum Affordable Home Price.
Frequently Asked Questions (FAQ)
How does DTI affect my affordability?
Your Debt-to-Income (DTI) ratio is the single biggest factor. A higher DTI indicates a greater strain on your monthly budget, which reduces the amount a lender is willing to offer for your mortgage and, consequently, reduces your overall affordability.
What is PITI?
PITI stands for Principal, Interest, Taxes, and Insurance. It represents the total monthly cost of owning a home. Lenders use the PITI amount to calculate the front-end DTI ratio.
Can I afford more house if I have a larger down payment?
Yes. A larger down payment reduces the required loan amount and the resulting P&I payment. Since the monthly P&I payment decreases, you free up more of your allowable DTI capacity, which allows for a higher overall property value.
What is a safe DTI ratio?
While the maximum allowed DTI is often 36% (and sometimes up to 43% for certain loan types), a safer, more conservative DTI ratio is below 30% to ensure financial flexibility for unexpected expenses.