This calculator helps you estimate how much house you can afford based on your income, debts, and down payment. It's a crucial first step in the home-buying process.
Understanding Mortgage Affordability
Determining how much you can afford for a mortgage is a critical part of the home-buying journey. Lenders typically look at two main ratios to assess your affordability: the front-end ratio (housing costs) and the back-end ratio (total debt obligations).
Front-End Ratio (Housing Costs)
This ratio compares your potential total monthly housing expenses (principal, interest, taxes, insurance, and sometimes HOA fees) to your gross monthly income. A common guideline is that your total housing costs should not exceed 28% of your gross monthly income.
Back-End Ratio (Total Debt Obligations)
This ratio compares all of your monthly debt payments (including the potential mortgage payment, car loans, student loans, credit card minimums, etc.) to your gross monthly income. Lenders often prefer this ratio to be no more than 36% of your gross monthly income, though some may go as high as 43% or even 50% depending on your creditworthiness and other factors.
The Calculator's Approach
Our calculator uses a simplified approach based on these principles. It estimates the maximum monthly mortgage payment you can afford by considering your annual income and existing monthly debts. It then works backward to estimate the maximum loan amount you could qualify for based on a given interest rate and loan term, and finally, the maximum home price considering your down payment.
Key Factors to Consider:
Gross Monthly Income: This is your income before taxes and other deductions.
Existing Monthly Debt Payments: Include all recurring debt obligations like car payments, student loans, and minimum credit card payments.
Down Payment: The larger your down payment, the less you'll need to borrow, increasing your affordability.
Interest Rate: Higher interest rates mean higher monthly payments for the same loan amount.
Loan Term: A longer loan term (e.g., 30 years vs. 15 years) will result in lower monthly payments but more interest paid over time.
Remember, this calculator provides an estimate. Your actual borrowing power will be determined by a mortgage lender after a full review of your credit history, assets, and liabilities.