Determining your home buying budget is the most critical first step in the real estate journey. While a bank might pre-approve you for a specific amount, understanding your personal comfort level with monthly payments is what ensures long-term financial stability.
The 28/36 Rule Explained
Lenders typically use the 28/36 rule to determine how much they are willing to lend you. This rule focuses on your Debt-to-Income (DTI) ratio:
Front-End Ratio (28%): Your total monthly housing costs (principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income.
Back-End Ratio (36%): Your total monthly debt obligations (including the new mortgage plus car loans, student loans, and credit card payments) should not exceed 36% of your gross monthly income.
Key Factors in Your Budget
Our calculator takes several variables into account to provide a realistic estimate:
Gross Annual Income: Your total earnings before taxes.
Monthly Debts: Any recurring monthly payments like auto loans or personal loans.
Interest Rate: Higher rates significantly decrease your buying power because more of your payment goes toward interest rather than the home's price.
Property Taxes & Insurance: These "hidden" costs can add hundreds of dollars to your monthly payment.
Realistic Example
Imagine a couple earning $100,000 annually with $500 in monthly car payments. They have $60,000 saved for a down payment. At a 7% interest rate, the 28/36 rule suggests they could afford a home priced approximately $395,000. Their monthly payment (PITI) would be around $2,333, which keeps their total debt ratio within the safe 36% limit.
Tips for Increasing Your Affordability
If the results are lower than you hoped, consider these strategies:
Improve your credit score: A higher score helps you qualify for lower interest rates.
Pay down existing debt: Reducing your monthly car or loan payments lowers your back-end DTI, allowing for a larger mortgage.
Save a larger down payment: Not only does this reduce the loan amount, but reaching 20% also eliminates the need for Private Mortgage Insurance (PMI).
function calculateAffordability() {
var annualIncome = parseFloat(document.getElementById('annualIncome').value);
var monthlyDebts = parseFloat(document.getElementById('monthlyDebts').value);
var downPayment = parseFloat(document.getElementById('downPayment').value);
var annualRate = parseFloat(document.getElementById('interestRate').value);
var loanTermYears = parseFloat(document.getElementById('loanTerm').value);
var propertyTaxRate = parseFloat(document.getElementById('propertyTax').value);
// Validate inputs
if (isNaN(annualIncome) || isNaN(monthlyDebts) || isNaN(downPayment) || isNaN(annualRate) || isNaN(loanTermYears)) {
alert("Please enter valid numbers in all fields.");
return;
}
var monthlyGross = annualIncome / 12;
var annualInsurance = 1500; // Estimated average annual homeowners insurance
// 28/36 Rule Calculation
var limit1 = monthlyGross * 0.28; // Front-end
var limit2 = (monthlyGross * 0.36) – monthlyDebts; // Back-end
var maxMonthlyPITI = Math.min(limit1, limit2);
// Mortgage math variables
var monthlyRate = (annualRate / 100) / 12;
var numPayments = loanTermYears * 12;
// Formula to back-calculate home price from monthly payment
// MonthlyPayment = (P * r * (1+r)^n) / ((1+r)^n – 1) + (HomePrice * TaxRate / 12) + (Insurance / 12)
// var factor = (r * (1+r)^n) / ((1+r)^n – 1)
// P = HomePrice – DownPayment
// maxMonthlyPITI = (HomePrice – DownPayment) * factor + (HomePrice * TaxRate/12) + (Insurance/12)
var factor = (monthlyRate * Math.pow(1 + monthlyRate, numPayments)) / (Math.pow(1 + monthlyRate, numPayments) – 1);
var monthlyTaxRate = (propertyTaxRate / 100) / 12;
var homePrice = (maxMonthlyPITI – (annualInsurance / 12) + (downPayment * factor)) / (factor + monthlyTaxRate);
if (homePrice < downPayment) {
homePrice = downPayment;
}
var loanAmount = homePrice – downPayment;
var monthlyPI = loanAmount * factor;
var monthlyTax = homePrice * monthlyTaxRate;
var monthlyIns = annualInsurance / 12;
// Display Results
document.getElementById('affordabilityResult').style.display = 'block';
document.getElementById('maxHomePrice').innerHTML = '$' + Math.round(homePrice).toLocaleString();
var detailsHtml = "Based on your income and debts, your maximum monthly housing payment (PITI) is estimated at $" + Math.round(maxMonthlyPITI).toLocaleString() + ".";
detailsHtml += "Estimated Monthly Breakdown:";
detailsHtml += "• Principal & Interest: $" + Math.round(monthlyPI).toLocaleString() + "";
detailsHtml += "• Property Taxes: $" + Math.round(monthlyTax).toLocaleString() + "";
detailsHtml += "• Insurance: $" + Math.round(monthlyIns).toLocaleString() + "";
detailsHtml += "This budget assumes a loan amount of $" + Math.round(loanAmount).toLocaleString() + " with a " + loanTermYears + "-year term.";
document.getElementById('resultDetails').innerHTML = detailsHtml;
// Scroll to results on mobile
document.getElementById('affordabilityResult').scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}