Determining your home buying budget is the most critical step in the real estate process. Lenders typically look at your "Debt-to-Income" (DTI) ratio to decide how much they are willing to lend you. While a bank might approve you for a large amount, it is essential to calculate a payment that fits comfortably within your monthly lifestyle.
The 28/36 Rule Explained
Financial experts often suggest the 28/36 rule. This rule states that your mortgage payment (including principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income, and your total debt payments (including the new mortgage, car loans, and student loans) should not exceed 36% of your gross monthly income.
Realistic Example:
If you earn $100,000 per year, your gross monthly income is $8,333.
28% for housing = $2,333/month.
36% for total debt = $3,000/month.
If you already have a $500 car payment, your available mortgage payment would be limited to $2,500 (because $3,000 – $500 = $2,500). Since $2,333 is lower than $2,500, your recommended max housing payment is $2,333.
Key Factors Impacting Affordability
Several variables change how much house you can buy today versus even a month ago:
Interest Rates: Even a 1% increase in interest rates can reduce your purchasing power by tens of thousands of dollars.
Down Payment: A larger down payment reduces your loan amount and monthly interest costs, allowing you to look at higher-priced homes.
Property Taxes & Insurance: These vary wildly by location. Our calculator estimates these at 1.5% of the home value annually to provide a conservative buffer.
Credit Score: Higher scores unlock lower interest rates, directly increasing your maximum purchase price.
function calculateAffordability() {
var annualIncome = parseFloat(document.getElementById('annualIncome').value);
var monthlyDebt = parseFloat(document.getElementById('monthlyDebt').value);
var downPayment = parseFloat(document.getElementById('downPayment').value);
var annualRate = parseFloat(document.getElementById('interestRate').value);
var years = parseFloat(document.getElementById('loanTerm').value);
var dtiLimit = parseFloat(document.getElementById('dtiRatio').value) / 100;
if (isNaN(annualIncome) || isNaN(monthlyDebt) || isNaN(downPayment) || isNaN(annualRate) || isNaN(years)) {
alert("Please enter valid numerical values.");
return;
}
var monthlyGross = annualIncome / 12;
// Calculate Max PITI based on DTI limit
// Max PITI = (MonthlyGross * DTI) – Other Monthly Debts
var maxMonthlyPITI = (monthlyGross * dtiLimit) – monthlyDebt;
// Front-end ratio check (28% rule is standard)
var frontEndLimit = monthlyGross * 0.28;
var finalMaxPayment = Math.min(maxMonthlyPITI, frontEndLimit);
if (finalMaxPayment <= 0) {
document.getElementById('affordabilityResult').style.display = 'block';
document.getElementById('maxHomePrice').innerHTML = "N/A";
document.getElementById('resultDetails').innerHTML = "Your current monthly debts exceed the recommended DTI ratio for a new mortgage.";
return;
}
// Estimate Taxes and Insurance (Approx 1.5% of home value / 12)
// Formula: Payment = [Loan * i * (1+i)^n] / [(1+i)^n – 1] + (HomePrice * 0.015 / 12)
// var HomePrice = Loan + DownPayment
// var M = finalMaxPayment
// M = [Loan * i * (1+i)^n] / [(1+i)^n – 1] + [(Loan + DownPayment) * 0.00125]
var monthlyRate = (annualRate / 100) / 12;
var totalMonths = years * 12;
var taxInsRate = 0.015 / 12; // 1.5% annual estimation
// Simplified Solve for Loan:
// M – (DownPayment * taxInsRate) = Loan * ( (i(1+i)^n / ((1+i)^n – 1)) + taxInsRate )
var factor = (monthlyRate * Math.pow(1 + monthlyRate, totalMonths)) / (Math.pow(1 + monthlyRate, totalMonths) – 1);
var adjustedMaxPayment = finalMaxPayment – (downPayment * taxInsRate);
var maxLoan = adjustedMaxPayment / (factor + taxInsRate);
var maxHomePrice = maxLoan + downPayment;
if (maxHomePrice < downPayment) {
maxHomePrice = downPayment;
}
// Display
document.getElementById('affordabilityResult').style.display = 'block';
document.getElementById('maxHomePrice').innerHTML = "$" + Math.round(maxHomePrice).toLocaleString();
var details = "Based on your income and debts, your maximum monthly housing payment (including taxes/insurance) is approximately $" + Math.round(finalMaxPayment).toLocaleString() + ".";
details += "Loan Amount: $" + Math.round(maxLoan).toLocaleString() + "";
details += "Down Payment: $" + downPayment.toLocaleString() + "";
details += "Estimated Monthly Principal & Interest: $" + Math.round(maxLoan * factor).toLocaleString();
document.getElementById('resultDetails').innerHTML = details;
}