Calculating your home affordability is the first step toward homeownership. While many buyers focus solely on the sticker price, lenders look at your Debt-to-Income (DTI) ratio. This calculator helps you determine a realistic purchase price based on your current financial situation, including income, debts, and the current interest rate environment.
Understanding the 36% Rule
Financial experts often recommend the "36% Rule," which suggests that your total monthly debt payments—including your new mortgage, car loans, and credit cards—should not exceed 36% of your gross monthly income. Some lenders may allow for a higher DTI, sometimes up to 43% or even 50% for specific loan programs like FHA loans, but staying near 36% ensures you have a financial "cushion" for home maintenance and life's unexpected expenses.
Key Factors in the Calculation
Annual Gross Income: Your total pay before taxes and other deductions.
Monthly Debts: Fixed monthly obligations such as student loans, car payments, and minimum credit card payments.
Down Payment: The cash you have available to put toward the purchase. A larger down payment reduces your loan amount and monthly payment.
Interest Rate: Even a 1% difference in interest rates can change your purchasing power by tens of thousands of dollars.
Example Scenario
Imagine a couple with a combined annual income of $100,000 and $500 in monthly debt. With a $40,000 down payment and a interest rate of 6.5% on a 30-year term:
Based on a 36% DTI, their total allowable monthly debt is $3,000. Subtracting their $500 debt leaves $2,500 for the mortgage payment (including taxes and insurance). This would typically allow for a home purchase price in the range of $380,000 to $410,000, depending on local property tax rates.
function calculateAffordability() {
var annualIncome = parseFloat(document.getElementById('annualIncome').value);
var monthlyDebt = parseFloat(document.getElementById('monthlyDebt').value) || 0;
var downPayment = parseFloat(document.getElementById('downPayment').value) || 0;
var interestRate = parseFloat(document.getElementById('interestRate').value);
var loanTerm = parseInt(document.getElementById('loanTerm').value);
var dtiRatio = parseFloat(document.getElementById('dtiRatio').value) / 100;
if (isNaN(annualIncome) || isNaN(interestRate) || annualIncome <= 0) {
alert("Please enter valid income and interest rate values.");
return;
}
// Monthly Gross Income
var monthlyGross = annualIncome / 12;
// Total allowable monthly payment (PITI + Debts)
var totalAllowableDebtPayment = monthlyGross * dtiRatio;
// Remaining for Mortgage (PITI)
var maxMonthlyPITI = totalAllowableDebtPayment – monthlyDebt;
if (maxMonthlyPITI <= 0) {
alert("Your monthly debts exceed the allowable limit for this DTI ratio.");
return;
}
// Estimate 1.2% for property taxes and 0.35% for insurance (standard estimates)
// We adjust the available P&I by roughly 20% to account for taxes/insurance
var estimatedPI = maxMonthlyPITI * 0.80;
// Mortgage formula: P = L[i(1+i)^n] / [(1+i)^n – 1]
// Solve for L: L = P * [(1+i)^n – 1] / [i(1+i)^n]
var monthlyRate = (interestRate / 100) / 12;
var numberOfPayments = loanTerm * 12;
var loanAmount = estimatedPI * (Math.pow(1 + monthlyRate, numberOfPayments) – 1) / (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments));
var maxHomePrice = loanAmount + downPayment;
// Update Display
document.getElementById('maxHomePrice').innerText = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', maximumFractionDigits: 0 }).format(maxHomePrice);
document.getElementById('resLoanAmount').innerText = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', maximumFractionDigits: 0 }).format(loanAmount);
document.getElementById('resMonthlyPI').innerText = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD' }).format(estimatedPI);
document.getElementById('resTaxes').innerText = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', maximumFractionDigits: 0 }).format(maxHomePrice * 0.012);
document.getElementById('resTotalMonthly').innerText = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD' }).format(maxMonthlyPITI);
document.getElementById('results-area').style.display = 'block';
}