Home Affordability Calculator

A tool that calculates the maximum purchasing power for a home answers this question from another perspective. Instead of focusing on the monthly costs of a particular house, it calculates the highest property price you can comfortably afford given your income. Enter your income, existing debts, available cash for a down payment and interest rate and amortization period to get the target property price and corresponding monthly rate.

This version also allows for a conversion. If you enter a particular property price and leave your income blank, it will tell you the required annual salary.

The 28/36 rule:

Lenders look at the debt-to-income ratio to determine how much they can lend you. A classic guideline is the 28/36 rule.

The first number is the front-end ratio. Your monthly housing costs should not be more than 28 percent of your gross monthly income. The second number is the back-end ratio. All of your monthly debt - including your housing, car loan, student loans and minimum credit card payments - shouldn't be more than 36 percent.

Let's say you and your partner have a combined gross monthly income of $6,000. With the maximum front-end ratio of 28%, your housing costs are limited to $1,680. If you already pay $400 per month on other debts, then the total allowable debt according to the maximum back-end ratio of 36% is $2,160, leaving only $1,760 available for housing expenses. The lower amount of $1,680 is the limit.

Criteria that actual lenders use often go beyond the 28/36.

The 28/36 rule was intentionally set very conservatively. Today many lenders use more lenient maximums to assess applicants' creditworthiness. This calculator allows you to choose an appropriate benchmark for your own loan.

If you choose a higher limit, the price of the house that you can afford will go up but your monthly financial flexibility will decrease. There is a difference between being able to meet the criteria and repay a certain amount each month and being comfortable with carrying that amount.

How to use the calculator:

Enter your gross annual income, total monthly debt payments, cash available for a down payment, interest rate and loan term. If you do not enter a target home price, the tool will show you the maximum home price you can afford, the corresponding mortgage amount and the monthly payment for that price.

Conversely you can enter a target house price and leave your income blank - the calculator will then calculate what gross annual income would be required for that price based on the same ratio. You can also enter both income and house price to see if a particular property fits within your budget.

The taxes, insurance and miscellaneous expenses sections are collapsed by default to show a simple estimate at first. By expanding each section you can add property tax, homeowners insurance, HOA fees (Homeowners Association), PMI (Private Mortgage Insurance) and closing costs for a value that is closer to the actual cost of ownership.

How the calculation works:

The calculator first determines the highest monthly rate that can be covered from income and converts this rate into a property price. The maximum monthly rate is determined by a ratio limit, using the lower value.

In this formula, I is the gross annual income, f and b are the front-end and back-end ratios (as percentages), and D is the current monthly debt. From that maximum amount, taxes, insurance, PMI, and HOA fees are subtracted. The remaining amount is then converted into a loan amount using a standard mortgage formula to determine the property price.

r is the monthly interest rate and n is the number of payments. The down payment is added to the loan amount to get the property price. As property tax and PMI vary proportionally with the property price, the calculator does not use iterative estimates or guesses but calculates the property price directly using a closed-form formula.

Down payment, PMI (private mortgage insurance), cash to close.

If you make a higher down payment, the loan amount will be lower and more of your monthly payments can go towards purchasing an expensive home. In addition, private mortgage insurance (PMI) is waived when your down payment reaches a certain percentage (20%) of the home's price. If the down payment falls below this percentage (20%), most conventional loans add PMI, which typically costs 0.5% to 1.5% of the loan amount annually. The calculator automatically factors in this as an upper limit. VA loans are an exception and do not require PMI.

It's not enough to have the deposit alone. Closing costs are usually a percentage (2-5) of the home price so the calculator will add this to the total amount of cash you need at closing. In addition, we recommend having some money set aside for repairs and other unexpected expenses that come with owning a home. Ideally, this should be enough to cover several months worth of mortgage payments.

What debts are taken into account?

The "Monthly Debts" field is where the ratio will be calculated. List all of your monthly obligations here including car loans, student loans, personal loans and minimum credit card payments. Also include alimony or child support if applicable. Note that current rent payments or a mortgage amount currently being applied for should not be included here. Also, everyday expenses like groceries, utilities and subscription services are not included since lenders do not consider these when calculating the ratio.

How can you reduce the financial burden of buying a home?

If the result of your calculations falls short of what you're hoping for, there are several factors that you can change. Paying down auto loans or credit card debt will free up room in your monthly debt ratio. A higher down payment reduces the amount of loan and may eliminate the need for PMI. A higher credit score allows you to get lower interest rates, and even a half percentage point reduction in the rate can affect how much house you can afford. Since taxes are still added to your monthly payments as long as you own property, it also helps to choose an area with lower property tax rates.

This calculator is for educational and planning purposes only. It does not constitute a loan offer or financial advice. It also does not cover all costs, taxes, or rules that lenders may apply. Actual approval results, interest rates, and monthly payments will vary based on creditworthiness, property, and lender. Please consult with a qualified mortgage professional before applying for a loan.