Understanding Mortgage Affordability
Determining how much mortgage you can afford is a crucial step in the home-buying process. Lenders typically use a few key ratios to assess your borrowing capacity:
- Front-End Ratio (Housing Ratio): This ratio compares your potential monthly housing expenses (principal, interest, taxes, and insurance – PITI) to your gross monthly income. A common guideline is that PITI should not exceed 28% of your gross monthly income.
- Back-End Ratio (Debt-to-Income Ratio – DTI): This ratio compares all your monthly debt obligations (including the potential mortgage payment, credit cards, auto loans, student loans, etc.) to your gross monthly income. Lenders often prefer this to be below 36%, though some programs allow up to 43% or even higher.
This calculator provides an estimate based on common lending guidelines, focusing on the maximum loan amount you might be approved for given your income and existing debts. It assumes a common mortgage structure and aims to give you a realistic range to start your home search. Several factors influence the final loan approval, including your credit score, employment history, and the specific lender's underwriting policies.
Key Factors Influencing Affordability:
- Income: Higher stable income generally means a larger loan capacity.
- Existing Debts: Lower monthly debt payments free up more of your income for a mortgage.
- Down Payment: A larger down payment reduces the loan amount needed and can improve your chances of approval and get you a better interest rate.
- Interest Rate: Even small changes in interest rates significantly impact your monthly payment and the total interest paid over the life of the loan.
- Loan Term: Shorter loan terms result in higher monthly payments but less total interest paid.
Use the results from this calculator as a starting point for conversations with mortgage brokers and lenders.
function calculateMortgageAffordability() {
var annualIncome = parseFloat(document.getElementById("annualIncome").value);
var monthlyDebt = parseFloat(document.getElementById("monthlyDebt").value);
var downPayment = parseFloat(document.getElementById("downPayment").value);
var interestRate = parseFloat(document.getElementById("interestRate").value);
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(annualIncome) || isNaN(monthlyDebt) || isNaN(downPayment) || isNaN(interestRate) || isNaN(loanTerm) ||
annualIncome < 0 || monthlyDebt < 0 || downPayment < 0 || interestRate < 0 || loanTerm <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
var grossMonthlyIncome = annualIncome / 12;
// Assume a maximum DTI of 36% and a maximum PITI of 28% for illustrative purposes.
// We'll calculate based on the more restrictive of the two, assuming the borrower
// wants to maintain a healthy DTI. For simplicity, we'll use a blended approach
// where total debt (monthlyDebt + potentialMortgage) is < 36% of grossMonthlyIncome.
// Let's target a maximum PITI that allows for a DTI around 36% overall.
// Max allowable total monthly payments = grossMonthlyIncome * 0.36
// Max allowable mortgage payment = (grossMonthlyIncome * 0.36) – monthlyDebt
var maxTotalMonthlyPayments = grossMonthlyIncome * 0.36;
var maxMortgagePayment = maxTotalMonthlyPayments – monthlyDebt;
if (maxMortgagePayment <= 0) {
resultDiv.innerHTML = "Based on your current debts and income, it may be difficult to afford a mortgage. Consider reducing debt or increasing income.";
return;
}
// Now calculate the maximum loan amount based on the maxMortgagePayment, interest rate, and loan term.
// Mortgage Payment Formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
// Where: M = Monthly Payment, P = Principal Loan Amount, i = monthly interest rate, n = total number of payments
var monthlyInterestRate = (interestRate / 100) / 12;
var numberOfPayments = loanTerm * 12;
if (monthlyInterestRate === 0) { // Handle zero interest rate case to avoid division by zero
var maxLoanAmount = maxMortgagePayment * numberOfPayments;
} else {
var maxLoanAmount = maxMortgagePayment * (Math.pow(1 + monthlyInterestRate, numberOfPayments) – 1) / (monthlyInterestRate * Math.pow(1 + monthlyInterestRate, numberOfPayments));
}
// The maximum loan amount is the total price of the home minus the down payment.
var estimatedMaxHomePrice = maxLoanAmount + downPayment;
// Format results for display
var formattedMaxLoanAmount = maxLoanAmount.toLocaleString('en-US', { style: 'currency', currency: 'USD' });
var formattedEstimatedMaxHomePrice = estimatedMaxHomePrice.toLocaleString('en-US', { style: 'currency', currency: 'USD' });
var formattedMaxMortgagePayment = maxMortgagePayment.toLocaleString('en-US', { style: 'currency', currency: 'USD' });
resultDiv.innerHTML =
"
Estimated Maximum Loan Amount You Might Qualify For: " + formattedMaxLoanAmount + "" +
"
Estimated Maximum Home Price You Could Afford (including down payment): " + formattedEstimatedMaxHomePrice + "" +
"
(This assumes a maximum total debt-to-income ratio of 36% and that your calculated maximum monthly mortgage payment would be " + formattedMaxMortgagePayment + ".)";
}
.calculator-container {
display: flex;
flex-wrap: wrap;
gap: 20px;
font-family: sans-serif;
max-width: 1000px;
margin: 20px auto;
border: 1px solid #ccc;
padding: 20px;
border-radius: 8px;
background-color: #f9f9f9;
}
.calculator-form {
flex: 1;
min-width: 300px;
background-color: #fff;
padding: 20px;
border-radius: 5px;
box-shadow: 0 2px 5px rgba(0,0,0,0.1);
}
.calculator-explanation {
flex: 1;
min-width: 300px;
background-color: #eef7ff;
padding: 20px;
border-radius: 5px;
box-shadow: 0 2px 5px rgba(0,0,0,0.05);
}
.calculator-form h2 {
margin-top: 0;
color: #333;
}
.calculator-explanation h3 {
margin-top: 0;
color: #0056b3;
}
.form-group {
margin-bottom: 15px;
}
.form-group label {
display: block;
margin-bottom: 5px;
font-weight: bold;
color: #555;
}
.form-group input[type="number"],
.form-group input[type="text"] {
width: calc(100% – 20px);
padding: 10px;
border: 1px solid #ccc;
border-radius: 4px;
font-size: 1em;
}
.calculator-form button {
background-color: #007bff;
color: white;
padding: 12px 20px;
border: none;
border-radius: 5px;
font-size: 1.1em;
cursor: pointer;
transition: background-color 0.3s ease;
}
.calculator-form button:hover {
background-color: #0056b3;
}
#result {
margin-top: 20px;
padding: 15px;
border: 1px dashed #007bff;
border-radius: 5px;
background-color: #e7f3ff;
}
#result p {
margin: 5px 0;
font-size: 1.1em;
color: #333;
}
#result p strong {
color: #007bff;
}
.calculator-explanation ul {
padding-left: 20px;
}
.calculator-explanation li {
margin-bottom: 10px;
line-height: 1.5;
color: #444;
}