How Much House Can I Afford?

Lenders decide how much they will lend mostly by comparing your monthly obligations with your income. Two ratios do most of the work: the front-end ratio looks only at housing costs, and the back-end ratio adds every other recurring debt. The calculator above applies those limits to your income, then works backward through the mortgage payment formula to the purchase price that fits.

Approval is not the same as comfort. Childcare, commuting, savings goals and the cost of furnishing a home do not show up in a debt-to-income ratio, so many buyers aim below the maximum a lender will allow.

Front-End Ratio

The front-end ratio, sometimes called the housing ratio, measures how much of your gross monthly income goes to the home itself. It includes the mortgage principal and interest, property tax, homeowners insurance, any mortgage insurance and homeowners association dues. A household earning $10,000 a month with $2,800 in total housing costs has a front-end ratio of 28%.

Front-end ratio = monthly housing cost ÷ gross monthly income

Monthly housing cost

mortgage principal and interest plus property tax, homeowners insurance, mortgage insurance and HOA dues

Gross monthly income

income before taxes and deductions, divided by 12

The calculator finds the highest price whose housing cost keeps both this ratio and the back-end ratio within the limits you choose.

Back-End Ratio

The back-end ratio, usually just called debt-to-income or DTI, adds all other recurring debt payments to the housing cost: car loans, student loans, minimum credit card payments, personal loans, child support and alimony. It is calculated as (housing cost + other monthly debts) ÷ gross monthly income. Everyday expenses such as groceries, utilities and phone bills are not counted.

Conventional Loans and the 28/36 Rule

Conventional mortgages carry no insurance or guarantee from a government agency. Most are sold to Fannie Mae or Freddie Mac, so they follow those companies' underwriting guidelines, and loans up to the yearly conforming limit are by far the most common type in the U.S.

The traditional guideline for these loans is the 28/36 rule: spend no more than 28% of gross monthly income on housing and no more than 36% on housing plus all other debts. With $120,000 of income and no other debt, that caps housing at $2,800 a month. At 7.108% for 30 years with 20% down, a 1.5% property tax and 0.5% insurance, that budget supports a home of about $397,000.

In practice, automated underwriting can approve conventional borrowers with a back-end ratio up to 45% or even 50% when they have strong credit, larger down payments or cash reserves. Treat 28/36 as a conservative benchmark rather than a hard ceiling.

Putting less than 20% down on a conventional loan usually adds private mortgage insurance, which raises the monthly cost and therefore lowers the price you can afford at a given ratio. Down payments can be as low as 3% on some programs.

FHA Loans

Loans insured by the Federal Housing Administration are designed for buyers with smaller savings or lower credit scores. Borrowers with a credit score of 580 or higher can put down as little as 3.5%, and scores from 500 to 579 require 10% down.

FHA's standard ratio limits are 31% for housing and 43% for total debt, a little looser than the 28/36 rule. Lenders may go higher with compensating factors such as significant cash reserves, minimal payment shock or a strong credit history.

The trade-off is mortgage insurance. FHA loans charge an upfront premium of 1.75% of the loan amount, usually rolled into the loan, plus an annual premium paid monthly that for most borrowers is about 0.55% of the balance. With less than 10% down, that annual premium lasts for the life of the loan unless you refinance into a conventional mortgage later. Include it in the insurance field to see its effect on affordability.

VA Loans

VA loans are guaranteed by the Department of Veterans Affairs and are available to eligible veterans, active-duty service members and some surviving spouses. They usually require no down payment and no monthly mortgage insurance, though most borrowers pay a one-time funding fee.

Rather than a front-end limit, the VA uses a single 41% debt-to-income guideline combined with a residual income test, which checks that enough money is left each month for living expenses after all major obligations are paid.

Custom Debt-to-Income Ratios

Choosing a percentage from the list applies it as a back-end limit: housing costs plus your other debts may not exceed that share of gross income. A lower figure, such as 25% or 30%, describes a comfortable budget with room to save; higher figures approach the most a lender is likely to approve.

Custom ratios are useful for testing your own rule of thumb, for jumbo or portfolio loans with their own guidelines, or for seeing how paying off a car loan would change what you can buy. Remember that taking on new debt between pre-approval and closing can change your ratio and put the loan at risk.

Unaffordability

If the result is lower than the homes you are looking at, there are several ways to close the gap.

• Pay down existing debt. Eliminating a $400 car payment frees that amount under the back-end limit and can raise the affordable price by tens of thousands of dollars.
• Save a larger down payment. More cash lowers the loan amount, may remove mortgage insurance and can earn a better rate.
• Improve your credit score. Rates are priced by credit tier, and a lower rate stretches the same payment over a larger loan. Paying bills on time and keeping credit card balances low are the fastest levers.
• Increase income. A raise, a second job or a co-borrower's income all count, as long as the lender can document them, typically with two years of history.
• Consider a longer term or a different loan program. A 30-year loan has a lower payment than a 15-year loan, and FHA, VA or USDA programs may allow higher ratios or smaller down payments.
• Look at less expensive homes or areas. Property taxes vary widely between counties, and a smaller home, a condo or a nearby town can bring costs within reach.
• Buy with someone else. Co-buying with a partner or family member combines incomes, though everyone on the loan is fully responsible for it.
• Wait and save. Renting a little longer while you build savings and credit is often wiser than stretching for a payment that leaves no margin for emergencies.

Frequently asked questions

Sources

• CFPB – What is a debt-to-income ratio?
• HUD – FHA loans
• U.S. Department of Veterans Affairs – VA home loans