How affordability is worked out
Lenders look at two debt-to-income ratios. The front-end ratio is your total housing payment divided by gross monthly income. The back-end ratio adds every other monthly debt. The traditional limits are 28% and 36%. Whichever limit is tighter sets your maximum payment, and the calculator works backward from that payment to a home price.
Example: $100,000 income, $500 of monthly debts and $40,000 down, at 6.5% for 30 years with 1.1% property tax and $1,800 insurance. The housing limit is $2,333.33 a month and the debt limit is $3,000 − $500 = $2,500, so housing sets the cap. That supports a home of about $320,000: a $280,463 loan at $1,772.72 principal and interest, plus $293.76 tax, $150 insurance and $116.86 PMI.
Ways to afford more house
- Pay down debts. Every $100 of monthly debt you clear can add roughly $15,000 to your budget when debts are what limit you.
- Put 20% down to drop PMI, or shop around for a lower rate. A rate half a point lower raises your price limit by about 5%.
- Check taxes and insurance locally. Property tax runs from about 0.3% to over 2% of the price depending on the state and county, which changes affordability a lot.
Lenders may approve you for more than feels comfortable. Leave room for repairs, savings and an emergency fund. To check a specific home, use the mortgage calculator, and to see your current ratio use the debt-to-income calculator.
Frequently asked questions
What is the 28/36 rule?
A guideline that your housing payment should be at most 28% of gross monthly income and all debts together at most 36%. Many lenders allow higher ratios, up to about 43% or more for some loans, but the 28/36 rule leaves more room in your budget.
How much house can I afford on $100,000 a year?
With $500 of other debts, $40,000 down and a 6.5% rate, about $320,000 under the 28/36 rule, or more with a larger down payment or a lower rate.
Does this include closing costs?
No. Closing costs are usually 2% to 5% of the price and are paid upfront, so set them aside on top of your down payment.
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