Mortgage Affordability Calculator
Use this calculator to estimate how much you can afford for a mortgage based on your income and estimated expenses. This is a preliminary estimate and not a loan approval.
Understanding Mortgage Affordability
Determining how much house you can afford is a crucial step in the home-buying process. This mortgage affordability calculator helps you estimate your potential borrowing power based on your financial situation.
Key Factors:
- Annual Gross Income: This is your total income before taxes and other deductions. Lenders typically look at your gross income to assess your ability to repay a loan.
- Existing Monthly Debt Payments: This includes all your recurring monthly obligations such as credit card payments, student loans, auto loans, and personal loans. Lenders use these to calculate your Debt-to-Income (DTI) ratio.
- Down Payment: The upfront amount you pay towards the purchase of the home. A larger down payment can reduce the loan amount needed and potentially improve your loan terms.
- Interest Rate: The annual interest rate on the mortgage. This significantly impacts your monthly payment and the total cost of the loan over time.
- Loan Term: The number of years you have to repay the mortgage. Common terms are 15 or 30 years. A shorter term usually means higher monthly payments but less interest paid overall.
How it Works:
Lenders generally use two main ratios to determine affordability: the Front-End Ratio (often called the Housing Ratio) and the Back-End Ratio (Debt-to-Income Ratio).
Housing Ratio (Front-End): This ratio compares your potential total housing costs (principal, interest, taxes, and insurance – PITI) to your gross monthly income. A common guideline is that PITI should not exceed 28% of your gross monthly income.
Debt-to-Income Ratio (Back-End): This ratio compares your total monthly debt obligations (including PITI) to your gross monthly income. A common guideline is that total debt should not exceed 36% to 43% of your gross monthly income, though this can vary by lender and loan type.
This calculator uses these principles to provide an estimated maximum mortgage amount. It calculates the maximum PITI you can afford based on the DTI ratio and then uses the loan term and interest rate to estimate the loan principal you could support with that PITI.
Example:
Let's say you have an annual gross income of $80,000, existing monthly debt payments of $500, a down payment of $40,000, an estimated annual interest rate of 6.5%, and you're considering a 30-year loan term.
Your gross monthly income is $80,000 / 12 = $6,666.67.
Assuming a maximum DTI of 43%, your total allowable monthly debt is $6,666.67 * 0.43 = $2,866.67.
The maximum PITI you can afford is $2,866.67 (total allowable debt) – $500 (existing debt) = $2,366.67.
With a 6.5% interest rate over 30 years, a monthly payment of $2,366.67 can support a loan principal of approximately $374,000.
Adding your $40,000 down payment, the estimated maximum home price you could afford is around $414,000 ($374,000 + $40,000).