This is an estimation. Actual borrowing amounts depend on lender policies, credit score, down payment, and other factors.
Understanding Your Mortgage Borrowing Power
Determining how much you can borrow for a mortgage is a crucial step in the home-buying process. Lenders use various factors to assess your borrowing capacity, and a key component of this is understanding your debt-to-income (DTI) ratio. This calculator provides an estimate based on common lending guidelines.
How the Calculator Works (The Math Behind It)
Lenders typically look at two types of debt-to-income ratios:
Front-end DTI (Housing Ratio): This measures the proposed mortgage payment (principal, interest, taxes, and insurance – PITI) against your gross monthly income. A common guideline is that PITI should not exceed 28% of your gross monthly income.
Back-end DTI (Total Debt Ratio): This measures all your monthly debt obligations (including the proposed mortgage payment) against your gross monthly income. A common guideline is that total debt payments should not exceed 36% of your gross monthly income.
Our calculator simplifies this by focusing on the total monthly debt limit. It estimates the maximum monthly mortgage payment you can afford by subtracting your existing monthly debt payments from a portion of your annual income (based on the common 36% back-end DTI rule).
Here's a simplified breakdown of the calculation:
Calculate Gross Monthly Income:Annual Income / 12
Estimate Maximum Allowable Monthly Debt Payments:Gross Monthly Income * 0.36 (This is the general back-end DTI limit)
Calculate Maximum Loan Amount: Using the calculated Maximum Affordable Monthly Mortgage Payment, the Interest Rate, and the Loan Term, we can solve for the loan principal (P) using the standard mortgage payment formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1] Where:
M = Maximum Affordable Monthly Mortgage Payment
P = Principal Loan Amount (what we are solving for)
n = Total number of payments (Loan Term (years) * 12)
Rearranging this formula to solve for P gives:
P = M [ (1 + i)^n – 1] / i(1 + i)^n
This calculation estimates the principal loan amount. It does NOT include potential down payments, property taxes, homeowners insurance, or private mortgage insurance (PMI), which will affect your actual total housing cost.
Factors Affecting Your Borrowing Power
While this calculator offers a helpful estimate, your actual borrowing capacity is influenced by several other critical factors:
Credit Score: A higher credit score typically leads to better interest rates and can increase your borrowing power.
Down Payment: A larger down payment reduces the loan amount needed, which can make lenders more comfortable or qualify you for a loan you might otherwise not. It also impacts your Loan-to-Value (LTV) ratio.
Loan Type: Different loan programs (e.g., FHA, VA, Conventional) have different qualification criteria.
Employment History and Stability: Lenders prefer consistent and verifiable income.
Savings and Assets: Proof of funds for closing costs and reserves can strengthen your application.
Lender-Specific Policies: Each bank or mortgage provider has its own underwriting guidelines.
Disclaimer: This calculator is for educational and estimation purposes only. It does not constitute financial advice or a loan commitment. Always consult with a qualified mortgage professional for personalized advice and accurate loan pre-approval.
function calculateBorrowingPower() {
var annualIncome = parseFloat(document.getElementById("annualIncome").value);
var existingDebts = parseFloat(document.getElementById("existingDebts").value);
var interestRate = parseFloat(document.getElementById("interestRate").value);
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var resultValueElement = document.getElementById("result-value");
// Input validation
if (isNaN(annualIncome) || annualIncome <= 0 ||
isNaN(existingDebts) || existingDebts < 0 ||
isNaN(interestRate) || interestRate <= 0 ||
isNaN(loanTerm) || loanTerm <= 0) {
resultValueElement.textContent = "Please enter valid numbers.";
return;
}
// Constants for calculations based on common guidelines (e.g., 36% back-end DTI)
var maxDtiRatio = 0.36; // 36% back-end DTI
// Calculate monthly income
var monthlyIncome = annualIncome / 12;
// Calculate maximum allowable monthly debt payments
var maxMonthlyDebtPayments = monthlyIncome * maxDtiRatio;
// Calculate maximum affordable monthly mortgage payment
var maxMonthlyMortgagePayment = maxMonthlyDebtPayments – existingDebts;
// Ensure maxMonthlyMortgagePayment is not negative
if (maxMonthlyMortgagePayment 0 && numberOfPayments > 0) {
var numerator = Math.pow(1 + monthlyInterestRate, numberOfPayments) – 1;
var denominator = monthlyInterestRate * Math.pow(1 + monthlyInterestRate, numberOfPayments);
maxLoanAmount = maxMonthlyMortgagePayment * (numerator / denominator);
} else if (maxMonthlyMortgagePayment > 0 && monthlyInterestRate === 0) {
// Handle zero interest rate case (though rare for mortgages)
maxLoanAmount = maxMonthlyMortgagePayment * numberOfPayments;
}
// Format the result as currency
var formattedMaxLoanAmount = "$" + maxLoanAmount.toFixed(0).replace(/\B(?=(\d{3})+(?!\d))/g, ",");
resultValueElement.textContent = formattedMaxLoanAmount;
}