Affordability is not the highest price a lender will approve. It is the price whose monthly cost still fits your income after the debts you already have. Two ratios do that work, and the tighter one sets the limit.
Two caps, and the smaller one wins
The front-end ratio limits the housing payment to a share of gross monthly income. The default here is 28 percent. The back-end ratio limits housing plus the other debts you already pay, such as a car loan or card minimums. The default is 36 percent. The calculator uses whichever budget is smaller.
Gross income is the right input, because that is what lenders use. Take-home pay is what you feel. If the result looks comfortable on gross income and tight on the paycheck, trust the paycheck. A pre-approval can also use a looser ratio than the one you would choose for yourself.
From a monthly budget back to a price
The tool solves the mortgage formula in reverse. Part of the monthly budget has to cover property tax and insurance, estimated here at 1.45 percent of the price per year. The rest can support a loan. Add the cash you can put down and you get a home price.
The rate does as much work as your salary. The same monthly budget buys less house when more of each payment is interest. The rate scenarios next to the result show that swing without changing your income. Closing costs, HOA dues, maintenance, and mortgage insurance are not in the price. Keep cash for them.
A maximum is not a target
Buying at the top of the range leaves no room for a repair, a parental leave, or a tax bill that comes in higher than the estimate. Try the calculator again at a lower ratio if the payment would make every other goal wait.
Paying down a car loan before you apply can raise the price the back-end ratio allows. Spending the down payment on closing costs does the opposite. The down payment field is the cash that reduces the loan, not your entire checking account.
How to use the home affordability calculator
The price is the most expensive home whose monthly housing cost still fits both a front-end limit (housing versus income) and a back-end limit (housing plus other debts versus income). The tighter of the two limits wins. A higher rate or a higher tax and insurance allowance lowers the price even when your income stays the same.
- Enter gross annual income, not take-home pay.
- Add the monthly debt payments you already have: car, student loans, and card minimums.
- Enter the cash you can put down.
- Read the maximum price, then check which debt-to-income limit set it.
How the math works
Two debt-to-income caps
The front-end ratio limits the housing payment to a share of gross monthly income. The default is 28%. The back-end ratio limits housing plus your other monthly debts. The default is 36%. The calculator uses whichever budget is smaller.
From a payment to a price
It solves the mortgage formula backward. Part of the monthly budget has to cover property tax and insurance, estimated here at 1.45% of the price per year. The rest can support a loan. Adding your down payment produces the home price.
Why the rate matters so much
The same monthly budget buys less house when the rate is higher, because more of each payment is interest. The rate scenarios next to the result show that swing without changing your income.
Income of $132,000 and $60,000 down
The defaults use $132,000 of gross income, $650 of other monthly debt, $60,000 down, a 6.35% rate, and a 30-year term. The front-end cap is 28% and the back-end cap is 36%.
The housing budget is about $3,080 a month, set by the 28% front-end limit. That supports a home price of about $465,000.
Terms worth knowing
- Front-end ratio
- Housing payment divided by gross monthly income.
- Back-end ratio
- Housing plus other debt payments, divided by gross monthly income.
- Gross income
- Income before taxes and other paycheck deductions.
- DTI
- Debt-to-income. Lenders use it to decide how large a payment you can carry.
What to do with the number
A lender’s maximum is not the same as a comfortable payment. Try a lower ratio if the result feels tight.
Paying down a car loan before you apply can raise the price the back-end ratio allows.
Keep cash for closing costs and a reserve. The down payment field is not your entire cash need.
Re-run the tool when a lender quotes a different rate.
Questions people ask
What this leaves out
Tax and insurance together are estimated at 1.45% of the price per year.
The rate is fixed and the term is the one you entered.
Income is gross, before taxes.
HOA dues, PMI, and maintenance are not in the housing budget.
These figures are estimates to help you understand the tradeoff. They are not tax, legal, insurance, or investment advice. A fiduciary can look at the same numbers in the context of the rest of your plan.