How affordability is worked out
Most lenders look at two numbers, both based on your income before tax:
- Housing ratio (28%): your full house payment (principal, interest, property tax, insurance, PMI and HOA) should be no more than 28% of your monthly income.
- Total debt ratio (36%): your house payment plus all other debt payments should be no more than 36%.
Calcist takes whichever limit is lower, then works backwards through the mortgage formula to find the loan that fits that payment. Add your down payment and you have the home price.
Worked example
You earn $90,000 a year ($7,500 a month) and pay $400 a month on a car loan. 28% of $7,500 is $2,100. 36% is $2,700, minus the $400 car payment leaves $2,300. The lower limit, $2,100, is your housing budget.
Take off $150 a month for insurance, then property tax and PMI, and the rest pays principal and interest. With $40,000 down at 6.5% for 30 years, that works out to a home of about $289,978.
| Income, debts, down payment | Home you can afford (6.5%, 30 years) |
|---|---|
| $60,000 a year, $300/month debts, $15,000 down | $176,517 |
| $90,000 a year, $400/month debts, $40,000 down | $289,978 |
| $120,000 a year, no debts, $60,000 down | $399,038 |
Examples assume 1.1% property tax, $1,800 a year insurance and 0.5% PMI when under 20% down.
What lenders may allow
28/36 is a cautious guide. Many loan programs allow higher ratios, for example up to about 43% total debt or more for some FHA and conventional loans. Being approved for a bigger loan doesn't mean the payment is comfortable, so leave room for savings, repairs and the rest of life. You can change both limits under "Insurance, HOA, PMI and lender limits".
Buying or owning a home? Mortgage payment · Amortization schedule · Refinance
This is an estimate for planning. A lender's pre-approval will use your credit, the exact loan program and local costs. It isn't financial advice.