Understanding home affordability is more than just looking at a monthly payment. Lenders primarily use the Debt-to-Income (DTI) ratio to determine how much they are willing to lend you. Typically, lenders prefer your total monthly debts (including your new mortgage) to be less than 36% to 43% of your gross monthly income.
Key Factors in Home Buying Power
Gross Income: Your total earnings before taxes are the foundation of your purchasing power.
Debt-to-Income Ratio: Existing car loans, student loans, and credit card minimums reduce the amount you can put toward a mortgage.
Down Payment: A larger down payment reduces the loan amount and can eliminate the need for Private Mortgage Insurance (PMI).
Interest Rates: Even a 1% difference in rates can change your buying power by tens of thousands of dollars.
Real-World Example:
If you earn $100,000 annually ($8,333/month) and have $500 in monthly car payments:
At a 36% DTI, your max total monthly debt is $3,000.
Subtracting your $500 car loan leaves $2,500 for your mortgage (Principal, Interest, Taxes, and Insurance).
With a 6.5% interest rate, this equates to roughly a $450,000 home price depending on your down payment.
The 28/36 Rule
Financial experts often suggest the 28/36 rule: your mortgage payment should not exceed 28% of your gross monthly income, and your total debt should not exceed 36%. Our calculator uses a balanced approach to ensure you don't become "house poor."
function calculateAffordability() {
var annualIncome = parseFloat(document.getElementById("annualGrossIncome").value);
var downPayment = parseFloat(document.getElementById("downPayment").value);
var monthlyDebts = parseFloat(document.getElementById("monthlyDebts").value);
var annualInterest = parseFloat(document.getElementById("interestRate").value);
var loanTermYears = parseInt(document.getElementById("loanTerm").value);
var propertyTaxRate = parseFloat(document.getElementById("propertyTax").value);
if (isNaN(annualIncome) || isNaN(downPayment) || isNaN(monthlyDebts) || isNaN(annualInterest)) {
alert("Please enter valid numerical values.");
return;
}
// 1. Calculate Monthly Gross Income
var monthlyGross = annualIncome / 12;
// 2. Use a Conservative DTI of 36%
var maxTotalMonthlyDebt = monthlyGross * 0.36;
// 3. Subtract existing debts to find available Monthly PITI (Principal, Interest, Taxes, Insurance)
var availableMonthlyPITI = maxTotalMonthlyDebt – monthlyDebts;
if (availableMonthlyPITI <= 0) {
document.getElementById("affordability-result-box").style.display = "block";
document.getElementById("maxHomePrice").innerHTML = "Insufficient Income";
document.getElementById("monthlyBreakdown").innerHTML = "Your current monthly debts exceed the recommended debt-to-income ratio.";
return;
}
// 4. Estimate Monthly Insurance and Taxes
// We assume insurance is roughly $100/mo and taxes are based on the user input rate
var estimatedInsurance = 125;
// Formula for Mortgage Payment (P): P = L [ c(1 + c)^n ] / [ (1 + c)^n – 1 ]
// We need to solve for L (Loan Amount), but P includes Taxes and Insurance.
// P_total = P_mortgage + (HomePrice * TaxRate / 12) + Insurance
var periodicRate = (annualInterest / 100) / 12;
var numberOfPayments = loanTermYears * 12;
var monthlyTaxFactor = (propertyTaxRate / 100) / 12;
// Solving: AvailableMonthlyPITI – Insurance = L * [ (r(1+r)^n)/((1+r)^n-1) ] + (L + DownPayment) * TaxFactor
// var M = [ r(1+r)^n ] / [ (1+r)^n – 1 ]
// AvailableMonthlyPITI – Insurance – (DownPayment * TaxFactor) = L * (M + TaxFactor)
var m = (periodicRate * Math.pow(1 + periodicRate, numberOfPayments)) / (Math.pow(1 + periodicRate, numberOfPayments) – 1);
var numerator = availableMonthlyPITI – estimatedInsurance – (downPayment * monthlyTaxFactor);
var denominator = m + monthlyTaxFactor;
var loanAmount = numerator / denominator;
var maxHomePrice = loanAmount + downPayment;
if (maxHomePrice < downPayment) {
maxHomePrice = downPayment;
}
// Update UI
document.getElementById("affordability-result-box").style.display = "block";
document.getElementById("maxHomePrice").innerHTML = "$" + Math.round(maxHomePrice).toLocaleString();
var monthlyMortgage = loanAmount * m;
var monthlyTax = maxHomePrice * monthlyTaxFactor;
document.getElementById("monthlyBreakdown").innerHTML =
"Based on a monthly payment of $" + Math.round(availableMonthlyPITI).toLocaleString() + ", " +
"including approximately $" + Math.round(monthlyMortgage).toLocaleString() + " for principal & interest, " +
"$" + Math.round(monthlyTax).toLocaleString() + " for taxes, and $" + estimatedInsurance + " for insurance.";
}