Understanding Your Mortgage Affordability
When considering a mortgage, lenders look at several factors to determine how much they are willing to lend you. This calculator helps you estimate your potential borrowing power by considering your income, existing debts, down payment, and the terms of the potential mortgage.
Key Factors Explained:
- Annual Household Income: This is the total income your household earns annually before taxes. Lenders often use a Debt-to-Income (DTI) ratio, and your income is a primary component of this.
- Total Monthly Debt Payments: This includes all your recurring monthly debt obligations like car loans, student loans, credit card minimum payments, and personal loans. These payments reduce the amount of income available for a mortgage.
- Down Payment Amount: The upfront cash you pay towards the home purchase. A larger down payment reduces the loan amount needed and can improve your chances of approval and secure better interest rates.
- Estimated Mortgage Interest Rate: The annual interest rate you expect to pay on your mortgage. Higher rates mean higher monthly payments, thus reducing affordability.
- Loan Term (Years): The duration over which you will repay the mortgage (e.g., 15, 20, or 30 years). Shorter terms result in higher monthly payments but less interest paid overall.
How the Calculation Works (Simplified):
This calculator uses a common rule of thumb where lenders might approve a mortgage payment (principal and interest) that is around 28% of your gross monthly income, while keeping your total debt (including the new mortgage payment) below 36% of your gross monthly income. It then works backward from this potential maximum monthly payment to estimate the maximum loan amount you could qualify for, considering your down payment and other loan terms.
Disclaimer: This is an estimation tool only and does not constitute financial advice. Actual loan approvals and amounts depend on the specific lender's underwriting criteria, your credit score, market conditions, and other factors.
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function calculateMortgageAffordability() {
var annualIncome = parseFloat(document.getElementById("annualIncome").value);
var existingDebt = parseFloat(document.getElementById("existingDebt").value);
var downPayment = parseFloat(document.getElementById("downPayment").value);
var interestRate = parseFloat(document.getElementById("interestRate").value) / 100; // Convert to decimal
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var resultElement = document.getElementById("result");
resultElement.innerHTML = ""; // Clear previous results
if (isNaN(annualIncome) || isNaN(existingDebt) || isNaN(downPayment) || isNaN(interestRate) || isNaN(loanTerm)) {
resultElement.innerHTML = "Please enter valid numbers for all fields.";
return;
}
// Rule of thumb: Max P&I payment is 28% of gross monthly income
var grossMonthlyIncome = annualIncome / 12;
var maxPiPayment = grossMonthlyIncome * 0.28;
// Rule of thumb: Total Debt-to-Income (DTI) ratio not exceeding 36%
var maxTotalDebtPayment = grossMonthlyIncome * 0.36;
var maxMortgagePaymentAllowed = maxTotalDebtPayment – existingDebt;
// Use the more conservative of the two limits for the monthly P&I payment
var affordableMonthlyPi = Math.min(maxPiPayment, maxMortgagePaymentAllowed);
if (affordableMonthlyPi 0) {
// Formula for Present Value of an Ordinary Annuity:
// PV = P * [1 – (1 + r)^-n] / r
// Where:
// PV = Present Value (Loan Amount)
// P = Periodic Payment (affordableMonthlyPi)
// r = periodic interest rate (monthlyInterestRate)
// n = number of periods (numberOfPayments)
maxLoanAmount = affordableMonthlyPi * (1 – Math.pow(1 + monthlyInterestRate, -numberOfPayments)) / monthlyInterestRate;
} else {
// If interest rate is 0, the loan amount is simply monthly payment * number of payments
maxLoanAmount = affordableMonthlyPi * numberOfPayments;
}
// Maximum loan amount is the calculated amount minus the down payment
var maxAffordableHomePrice = maxLoanAmount + downPayment;
// Display results
resultElement.innerHTML =
"Estimated Maximum Loan Amount: $" + maxLoanAmount.toFixed(0).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + "" +
"Estimated Maximum Home Price You Can Afford: $" + maxAffordableHomePrice.toFixed(0).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + "";
}