Determine your maximum affordable home price and loan amount based on standard debt-to-income (DTI) ratios. This calculator factors in your income, existing debts, and estimated housing costs to provide a conservative, rule-of-thumb affordability figure.
How Much Mortgage Can I Afford Calculator
Maximum Affordable Loan Amount: —
Mortgage Affordability Formula
Affordability is determined using the 28/36 Debt-to-Income (DTI) rule. The calculator finds the lesser of two maximum P&I payments derived from these rules and uses the Loan Principal formula to find the maximum affordable loan amount (P).
1. Maximum PITI Payment (M_{28}) (28% Rule):
$$ M_{28} = 0.28 \times \text{GMI} $$
2. Maximum Total Debt Payment (M_{36}) (36% Rule):
$$ M_{36} = (0.36 \times \text{GMI}) – \text{TMD} $$
3. Maximum Loan Principal (P) (Based on Affordability):
$$ P = M_{Afford} \times \frac{[ (1 + i)^n – 1 ]}{[ i \times (1 + i)^n ]} $$
Where: M_{P\&I} = \min(M_{28} – \text{Extras}, M_{36} – \text{TMD} – \text{Extras})
And: i = \text{Annual Rate} / 1200, n = \text{Term in Years} \times 12
Formula Sources: CFPB (DTI Rule) Investopedia (P&I Formula)
Variables Explained
- Gross Monthly Income (GMI): Your total income before taxes and deductions. This is the foundation for affordability limits.
- Total Monthly Debts (TMD): Recurring minimum monthly payments for non-mortgage debts (e.g., auto loans, student loans, credit cards).
- Down Payment Amount (DP): The cash amount you plan to contribute towards the purchase price.
- Annual Interest Rate (%): The rate on your mortgage. A higher rate means less affordable principal.
- Loan Term (Years): The length of the loan (usually 15 or 30 years). Longer terms reduce monthly payments, increasing affordability.
- Estimated Monthly PITI Extras: Your non-principal and interest housing costs, including Property Taxes, Home Insurance, HOA fees, and PMI.
What is Mortgage Affordability?
Mortgage affordability is the maximum loan amount and corresponding home price a lender is willing to approve based on a borrower’s financial health. Lenders use strict guidelines, primarily the Debt-to-Income (DTI) ratio, to minimize risk. DTI limits ensure that your total monthly obligations are manageable relative to your monthly income.
The calculation is commonly simplified into two ratios: the front-end ratio (28% of GMI for housing costs) and the back-end ratio (36% of GMI for all debt, including the mortgage). Your maximum affordable payment is the lower of the two limits, after accounting for estimated taxes and insurance. Banks are legally required to assess your ability to repay, making this calculation a critical first step in the home-buying process.
How to Calculate Affordability (Example)
- Determine DTI Limits: Calculate 28% of GMI ($7,000 * 0.28 = $1,960) and 36% of GMI ($7,000 * 0.36 = $2,520).
- Calculate Max PITI Payments: Subtract existing monthly debts ($500) from the 36% limit ($2,520 – $500 = $2,020). The 28% rule provides the other limit ($1,960).
- Find Max P&I Payment: The lower of the two results (in this case, $1,960) dictates the maximum allowed housing payment. Subtract estimated PITI extras ($600) to find the maximum Principal & Interest (P&I) payment: $1,960 – $600 = $1,360.
- Solve for Loan Principal: Use the standard amortization formula ($P$) with the maximum P&I payment ($1,360), interest rate (6.5%), and term (30 years) to find the max loan amount ($213,039).
- Calculate Home Price: Add the Down Payment ($50,000) to the Max Loan Principal: $213,039 + $50,000 = $263,039.
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Frequently Asked Questions (FAQ)
What is the 28/36 Rule?
It’s an unofficial guideline used by many lenders: your total monthly housing expenses (PITI) should not exceed 28% of your gross monthly income, and your total monthly debt obligations (including PITI) should not exceed 36% of your gross monthly income.
Does a larger down payment increase my affordability?
Yes. A larger down payment increases the total home price you can afford without changing your maximum loan amount, as the affordability calculation determines the maximum *loan* you can take out. Also, a down payment of 20% or more typically removes Private Mortgage Insurance (PMI), which reduces your “PITI Extras” and increases your P&I capacity.
Do I have to include my credit card debt in the calculation?
Yes, all revolving credit (credit cards) and installment loans (auto, student) with a minimum required monthly payment must be included in your Total Monthly Debts (TMD) for the DTI calculation.
What other factors might limit my affordability?
Besides DTI, lenders consider your credit score, job stability, and cash reserves (savings after closing). If your credit score is low, you may not qualify for the low interest rate used in the calculation, which would reduce your final affordable loan amount.