Residential Purchasing Power Calculator
Determine your maximum property value based on financial ratios.
Your Estimated Purchasing Capacity
How Residential Purchasing Power is Calculated
Understanding how much property you can realistically acquire involves looking at two primary financial benchmarks used by institutions: the Front-End Ratio and the Back-End Ratio. These metrics ensure that your future housing costs do not overwhelm your household budget.
The 28% Rule (Front-End): This guideline suggests that your total housing expenses—which include the principal, interest, taxes, and insurance—should not exceed 28% of your gross monthly earnings.
The 36% Rule (Back-End): This is often considered the more critical metric. It dictates that your total debt obligations, including your new housing payment plus existing monthly liabilities like car payments or credit card minimums, should stay below 36% of your gross monthly earnings.
Key Factors in the Calculation
- Gross Annual Earnings: Your total income before taxes or deductions.
- Total Monthly Liabilities: Any recurring debt payments you are currently making.
- Upfront Purchase Capital: The cash you have available to put toward the acquisition immediately.
- Yearly Financing Fee: The percentage cost charged by a lender for the borrowed capital.
Realistic Example
Suppose a household has Gross Annual Earnings of $100,000. Their monthly gross income is $8,333.
1. Following the 28% rule, their maximum housing payment is $2,333.
2. If they have $500 in Monthly Liabilities, the 36% rule allows for $3,000 in total debt. Subtracting the $500 liabilities leaves $2,500 for housing.
3. The calculation uses the lower of these two ($2,333).
4. After subtracting estimated taxes and insurance, the remaining amount determines the maximum amount they can borrow based on current Yearly Financing Fees.