Purchasing a home is likely the largest financial commitment you will ever make. To ensure you don't become "house poor," lenders and financial advisors look at your Debt-to-Income (DTI) ratio. This calculator helps you estimate your maximum home purchase price by analyzing your cash flow and existing financial obligations.
The 28/36 Rule Explained
Lenders often follow the 28/36 rule to determine creditworthiness:
28% Front-End Ratio: Your total monthly housing costs (mortgage, taxes, insurance) should not exceed 28% of your gross monthly income.
36% Back-End Ratio: Your total debt payments (housing costs + car loans + student loans + credit cards) should not exceed 36% of your gross monthly income.
Example Calculation
If you earn $85,000 per year, your gross monthly income is approximately $7,083. Using the 36% DTI rule, your total monthly debt payments should stay below $2,550. If you already pay $400 for a car loan, you have $2,150 available for your mortgage payment, property taxes, and home insurance.
Key Factors Influencing Your Budget
1. Down Payment: A larger down payment reduces the loan amount, which lowers your monthly interest expense and may eliminate the need for Private Mortgage Insurance (PMI).
2. Interest Rates: Even a 1% difference in interest rates can swing your buying power by tens of thousands of dollars. Higher rates mean higher monthly payments for the same loan amount.
3. Existing Debt: Your "Back-End" DTI includes all recurring debts. Reducing your credit card balances or paying off a vehicle before applying for a mortgage can significantly increase your home buying budget.
function calculateAffordability() {
var annualIncome = parseFloat(document.getElementById('annualIncome').value);
var downPayment = parseFloat(document.getElementById('downPayment').value);
var monthlyDebts = parseFloat(document.getElementById('monthlyDebts').value);
var annualRate = parseFloat(document.getElementById('interestRate').value);
var years = parseInt(document.getElementById('loanTerm').value);
var dti = parseFloat(document.getElementById('dtiLimit').value) / 100;
if (isNaN(annualIncome) || isNaN(downPayment) || isNaN(monthlyDebts) || isNaN(annualRate)) {
alert("Please enter valid numerical values.");
return;
}
// Monthly Gross Income
var monthlyIncome = annualIncome / 12;
// Total allowable monthly debt payment (Back-end DTI)
var maxMonthlyPaymentTotal = monthlyIncome * dti;
// Monthly amount available for PITI (Principal, Interest, Taxes, Insurance)
// We estimate 15% of the payment goes toward Taxes and Insurance
var availableForPITI = maxMonthlyPaymentTotal – monthlyDebts;
if (availableForPITI <= 0) {
document.getElementById('result').style.display = "block";
document.getElementById('maxPrice').innerHTML = "Budget Exceeded";
document.getElementById('breakdown').innerHTML = "Your current monthly debts exceed the recommended DTI ratio for your income level.";
return;
}
// Estimate Principal and Interest (P&I) as 85% of available PITI
var availableForPI = availableForPITI * 0.85;
// Amortization Formula to find Principal: P = L[c(1 + c)^n] / [(1 + c)^n – 1]
// Replaced to solve for L (Loan Amount): L = P * [(1 + c)^n – 1] / [c(1 + c)^n]
var monthlyRate = (annualRate / 100) / 12;
var numberOfPayments = years * 12;
var loanAmount = availableForPI * (Math.pow(1 + monthlyRate, numberOfPayments) – 1) / (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments));
var maxPurchasePrice = loanAmount + downPayment;
// Formatting
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
});
document.getElementById('result').style.display = "block";
document.getElementById('maxPrice').innerHTML = "Estimated Budget: " + formatter.format(maxPurchasePrice);
document.getElementById('breakdown').innerHTML =
"Based on your income, you can afford a monthly mortgage payment of approximately " + formatter.format(availableForPI) + " (Principal & Interest). " +
"Loan Amount: " + formatter.format(loanAmount) + "" +
"Down Payment: " + formatter.format(downPayment) + "" +
"Total Monthly Debt Capacity: " + formatter.format(maxMonthlyPaymentTotal);
}