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Mortgage Affordability Calculator

This calculator helps you estimate how much house you can afford based on your income, debts, and desired down payment. It considers common lending criteria to give you a realistic idea of your borrowing power.

Understanding Mortgage Affordability

Determining how much house you can afford is a crucial step in the home-buying process. Lenders typically use a few key metrics to assess your ability to repay a mortgage, primarily focusing on your debt-to-income ratio (DTI).

Debt-to-Income Ratio (DTI)

Your DTI is a comparison of your monthly debt obligations to your gross monthly income. Lenders generally look at two types of DTI:

  • Front-end ratio (Housing Ratio): This compares your potential total monthly housing costs (principal, interest, taxes, insurance, and HOA fees) to your gross monthly income. A common guideline is to keep this below 28%.
  • Back-end ratio (Total Debt Ratio): This compares all your monthly debt obligations (including housing costs, credit cards, car loans, student loans, etc.) to your gross monthly income. Lenders often prefer this to be 36% or lower, though some programs allow for higher ratios (up to 43% or even 50% in some cases).

This calculator focuses on the back-end ratio to estimate your maximum affordable loan amount. It assumes a maximum allowable housing payment that, when added to your existing monthly debt payments, does not exceed a certain percentage of your gross monthly income. We've used a conservative estimate for the maximum allowable total debt ratio.

How the Calculator Works:

The calculator estimates your maximum affordable monthly mortgage payment by considering your gross monthly income and subtracting your existing monthly debt payments. It then uses a common mortgage payment formula to determine the maximum loan amount you could finance with that affordable payment, given your specified interest rate and loan term.

Formula Breakdown:

  1. Maximum Allowable Housing Payment: (Gross Monthly Income * Target DTI Ratio) – Monthly Debt Payments. We use a target DTI ratio of 36% as a general guideline.
  2. Loan Amount Calculation: The calculator then works backward from the Maximum Allowable Housing Payment using the standard mortgage payment formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1] Where: M = Monthly Mortgage Payment (this is our Maximum Allowable Housing Payment) P = Principal Loan Amount (what we are trying to find) i = Monthly Interest Rate (Annual Interest Rate / 12 / 100) n = Total Number of Payments (Loan Term in Years * 12) Rearranging this to solve for P, we get: P = M * [ (1 + i)^n – 1] / [ i(1 + i)^n ]
  3. Estimated Maximum Purchase Price: The calculated Loan Amount is added to your Down Payment to estimate the maximum purchase price you can afford.

Important Note: This calculator provides an estimate only. Actual mortgage approval depends on many factors, including your credit score, lender-specific policies, lender fees, property taxes, homeowner's insurance, and potential Private Mortgage Insurance (PMI).

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