Use this tool to estimate the maximum mortgage loan principal you can afford based on your annual income, current debts, and prevailing interest rates.
Mortgage Loan Affordability Calculator
Your Estimated Affordability
Maximum Affordable Loan Principal: Maximum Affordable Home Price:Detailed Calculation Steps
The results are based on the standard 36% Back-End Debt-to-Income (DTI) Ratio rule used by most lenders.
Mortgage Loan Affordability Formula
Affordability is primarily governed by the Debt-to-Income (DTI) ratio, specifically the Back-End DTI (PITI + Debts / Gross Income). Lenders typically cap this at 36% (or sometimes higher, e.g., 43%).
1. Maximum Monthly P&I Payment (M):
$$ M = ((\text{Annual Income} / 12) \times 0.36) – \text{Monthly Debts} – (\text{Annual PITI Expenses} / 12) $$
2. Maximum Loan Principal (P):
$$ P = M \left[ \frac{(1+r)^n – 1}{r(1+r)^n} \right] $$
Where: $r = \text{Monthly Interest Rate} \left(\frac{\text{Annual Rate}}{1200}\right)$, $n = \text{Loan Term in Months} $
Formula Source: Consumer Financial Protection Bureau (CFPB) – DTI Guidance, Investopedia – Mortgage Affordability
Variables
- Annual Gross Income ($): Your total annual income before taxes and deductions.
- Monthly Non-Housing Debts ($): Minimum monthly payments for credit cards, car loans, student loans, etc.
- Annual Interest Rate (%): The expected annual percentage rate (APR) for the mortgage.
- Loan Term (Years): The duration of the loan, typically 15 or 30 years.
- Down Payment Percentage (%): The percentage of the home price you pay upfront.
- Annual Property Taxes & Insurance ($): Estimated annual cost for PITI components other than Principal and Interest.
What is Mortgage Loan Affordability?
Mortgage loan affordability refers to a borrower’s capacity to comfortably meet their monthly housing expenses, including principal, interest, property taxes, and homeowner’s insurance (PITI), without jeopardizing their financial stability. Lenders assess this using key ratios, most notably the Debt-to-Income (DTI) ratio.
The most common underwriting standard is the 36% rule (Back-End DTI), which stipulates that a borrower’s total monthly debt obligations (including the new mortgage payment) should not exceed 36% of their gross monthly income. This calculator uses a slightly more aggressive 43% DTI rule to provide a maximum theoretical loan amount but defaults to the stricter 36% rule for its core calculation, as this is the standard for Qualified Mortgages.
How to Calculate Affordability (Example)
- Determine Gross Monthly Income: $100,000 Annual Income / 12 = $8,333.33
- Calculate Max Total Monthly Debt (36% DTI): $8,333.33 \times 0.36 = $3,000.00
- Subtract Existing Debts and PITI Expenses: If Monthly Debts are $500 and Annual PITI Expenses are $6,000 ($500/month), then $3,000 – $500 – $500 = $2,000. This is the Max Affordable P&I Payment (M).
- Calculate Loan Principal: Using the amortization formula, convert the $2,000 Max P&I Payment (M) over 30 years at 6.0% (Rate) into a maximum loan principal ($P$). This would result in a Max Principal of approximately $333,500.
- Determine Max Affordable Price: If the Down Payment is 20%, the home price is $333,500 / (1 – 0.20) = $416,875.
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Frequently Asked Questions (FAQ)
- What DTI ratio do lenders prefer? Lenders generally prefer a total (back-end) DTI ratio of 36% or less. Government-backed loans (FHA, VA) and some conventional programs may allow up to 43% or even 50% in special circumstances, but 36% is the safest target.
- How does a large down payment affect affordability? A larger down payment reduces the required loan principal, which decreases the monthly Principal & Interest (P&I) payment. This lowers your DTI ratio, significantly increasing your overall affordability and reducing interest costs.
- What is PITI? PITI stands for Principal, Interest, Taxes, and Insurance. It is the full monthly cost of homeownership that lenders use when calculating your affordability.
- Can I include bonuses or overtime in my annual income? Yes, but lenders usually require a two-year history of receiving consistent bonus or overtime income before they will include it as part of your qualifying annual income.