About the Mortgage Affordability Calculator
Lenders approve you using two caps. The first — the “front” ratio — says the full monthly housing payment should stay under about 28% of gross income. The second — the “back” ratio — says all debt obligations combined, home loans included, should stay below roughly 36% (and some loan programs stretch further, but that is where budgets bend).
This tool applies both ceilings and answers with the actual home price they support, so a realistic number can be in mind before a pre-approval letter arrives shrinking it.
The formula behind it
The tool derives an affordable home price in four steps:
Max PITI = min( front% × income/12 , back% × income/12 − other debits )That maximum monthly housing payment (PITI) is converted to a loan the standard payment formula supports at the given rate and term, plus the down payment. Taxes and insurance are estimated at 1.6% of the purchase price per year and subtracted before the loan amount is applied, and PMI at 0.5%/yr is added if the down payment is under 20%.
Worked example
The defaults above assume a household with $84,000 of gross income:
- 28% ceiling → $1,960/month for housing. 36% ceiling → $2,520 minus $450 other debts = $2,070. The tighter cap is $1,960.
- Setting aside about $470 of that for taxes, insurance and PMI, roughly $1,493 remains for principal and interest.
- At 6.5% over 30 years, $1,493 per month supports about a $236,000 loan. Add the $40,000 down payment.
Takeaway: ≈ $276,000 is the maximum home price this budget should stretch to — very different from the larger figures lenders would approve with stretchier ratios.
What moves the result
- Debt load — credit card minimums and student loans reduce the back-ratio budget dollar for dollar.
- Rate environment — a 1% higher APR lowers the affordable price by roughly 8–10%.
- Down payment matches — 20% down clears PMI and buys more house for the same payment.
- Local taxes and insurance — 1.6%/yr is an estimate; some areas run double that, which trims affordability accordingly.
- Income stability matters for the reviewer sitting across from you: bonuses are discounted, overtime often ignored.
Practical tips
- Stay below the 28% ceiling on purpose. Lenders approve the 31–43% region; actual comfort usually proves lower.
- Pay minimum credit card balances in full for 2–3 months before applying — balances are the number printed on your report at pull time.
- Leave the other debt ceilings unchanged here even if you plan to pay a car loan off soon; approvals count what exists today.
- Check affordability against a stress case: could you carry this payment for 12 months if a spouse switched to part-time work?
- Red-book your “must haves” against this maximum: pick a price cap 10–15% below the tool’s number for renovations or closing costs.
Frequently asked questions
Why use 28/36 instead of the ratios my lender quoted (43%)?
The 43% figure is the pass/fail line for qualified mortgages at some lenders, but 43% of gross income on housing plus debt leaves most households with nothing for utilities, childcare, emergencies or an occasional dinner out.
Do lenders count bonus or freelance income?
Usually only after a two-year documented history. If using it, the tool won’t tell you that — apply conservative treatment on your own.
My city’s property taxes are much higher than 1.6% per year. What should I do?
Overwrite it mentally: lower a few percentage points of the tool’s affordability result for every extra 0.5% of annual tax burden — or shop in neighborhoods with the exact tax rate in mind.