Determining your home buying budget is the most critical step in the real estate journey. Lenders don't just look at your salary; they analyze your Debt-to-Income (DTI) ratio. This ratio compares your total monthly debt obligations to your gross monthly income. Most conventional lenders prefer a DTI ratio under 43%, though some programs allow for higher limits.
Understanding the 28/36 Rule
Financial advisors often suggest the 28/36 rule:
28%: Your monthly mortgage payment (including taxes and insurance) should not exceed 28% of your gross monthly income.
36%: Your total debt payments (mortgage plus car loans, student loans, and credit cards) should not exceed 36% of your gross monthly income.
Key Factors in the Calculation
Our calculator uses several variables to provide a realistic estimate:
Gross Annual Income: Your total earnings before taxes and deductions.
Monthly Debts: Fixed payments like car loans, student loans, and minimum credit card payments.
Down Payment: The cash you have available to pay upfront. A higher down payment reduces your loan amount and monthly payment.
Interest Rate: Even a 1% difference in interest rates can change your purchasing power by tens of thousands of dollars.
Example Calculation
If you earn $100,000 per year, your gross monthly income is $8,333. Using a conservative 36% DTI, your total allowable monthly debt is $3,000. If you already have $500 in monthly car and student loan payments, you have $2,500 left for your mortgage payment. At a 6.5% interest rate on a 30-year term with a $60,000 down payment, you could potentially afford a home priced around $455,000.
Frequently Asked Questions
Does this include property taxes?
This specific calculation focuses on the Principal and Interest (P&I). However, it is standard practice to set aside approximately 1.2% of the home's value annually for property taxes and insurance. Our calculator factors in a buffer for these expenses within the DTI selection.
How does my credit score affect affordability?
Your credit score primarily dictates your interest rate. A higher score secures a lower rate, which increases the amount of money you can borrow while keeping the monthly payment the same.
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 = parseInt(document.getElementById('loanTerm').value);
var dtiLimit = parseFloat(document.getElementById('dtiRatio').value) / 100;
if (isNaN(annualIncome) || isNaN(monthlyDebt) || isNaN(downPayment) || isNaN(annualRate)) {
alert("Please enter valid numerical values.");
return;
}
// Calculate maximum monthly mortgage payment (P&I + Taxes/Insurance Buffer)
var grossMonthlyIncome = annualIncome / 12;
var totalAllowableDebt = grossMonthlyIncome * dtiLimit;
var maxMonthlyPayment = totalAllowableDebt – monthlyDebt;
// Estimate Taxes and Insurance at ~1.5% of loan value annually (rough buffer)
// We adjust the available payment for P&I by 20% to account for Taxes/Insurance
var availableForPI = maxMonthlyPayment * 0.80;
if (availableForPI <= 0) {
document.getElementById('affordResult').style.display = 'block';
document.getElementById('maxPrice').innerText = "Insufficient Income";
document.getElementById('resultBreakdown').innerHTML = "Based on your current debt and income, a mortgage payment does not fit within the selected DTI ratio.";
return;
}
var monthlyRate = (annualRate / 100) / 12;
var numberOfPayments = years * 12;
// Loan Principal Formula: P = PMT * [(1 – (1 + r)^-n) / r]
var maxLoan = availableForPI * ((1 – Math.pow(1 + monthlyRate, -numberOfPayments)) / monthlyRate);
var maxPurchasePrice = maxLoan + downPayment;
// Formatting
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
});
document.getElementById('affordResult').style.display = 'block';
document.getElementById('maxPrice').innerText = formatter.format(maxPurchasePrice);
var breakdown = "Monthly Income: " + formatter.format(grossMonthlyIncome) + "" +
"Max Monthly P&I: " + formatter.format(availableForPI) + "" +
"Estimated Loan Amount: " + formatter.format(maxLoan) + "" +
"Down Payment Applied: " + formatter.format(downPayment);
document.getElementById('resultBreakdown').innerHTML = breakdown;
}