How affordability is calculated
Before starting your home search, it’s essential to consider:
- The type of home you want and can realistically afford
- The mortgage amount you may qualify for
- The expected monthly payment costs
- The savings needed for your down payment
Key factors that determine how much home you can afford
- Your monthly expenses, including mortgage payments, household costs, insurance, property taxes, auto loans, and other financial commitments.
- How lenders assess affordability. Similar to lenders, our Affordability Calculator uses your Debt-to-Income Ratio (DTI) to estimate the home price within your budget.
Know these terms and how they work
The 28/36 Rule
A simple guideline to understand how much debt you can comfortably manage:
- Your housing costs should stay below 28% of your gross monthly income.
- Your total monthly debt payments should not exceed 36% of your income.
Debt-to-income ratio (DTI)
Debt-to-Income (DTI) Ratio shows the percentage of your gross monthly income (income before taxes) that goes toward paying your monthly debts. These debts typically include recurring payments such as personal loans, auto loans, student loans, credit card bills, child support, and other obligations listed on your credit report. It does not include mortgage or rent payments, or everyday expenses like food, transportation, and utilities.
To get an accurate estimate, you must provide your correct monthly debt and annual income. DTI is calculated as:
Monthly Debt ÷ Gross Monthly Income = DTI %
DTI usually ranges between 20% and 50%, representing the upper and lower limits of affordability. This range not only helps you understand what you can realistically afford but also assists lenders in assessing your eligibility for a mortgage loan.
In general, a DTI of 36% or lower is considered manageable by most lenders. The lower your DTI, the higher your chances of qualifying for a loan. On the other hand, a higher DTI suggests greater difficulty in keeping up with payments.
Below is a guide showing estimated DTI percentages and what they mean for your budget—helping you see how much you may be able to afford in monthly payments.
Debt-to-income ratio (DTI)
Know these terms and how they work
Common Terms for Affordability
Borrower
A borrower is an individual who obtains a loan from a lender. In the case of a mortgage, the borrower is also called the mortgagor, while the bank or lender is known as the mortgagee.
Debt Payments
Debt payments are the amounts you pay regularly to repay borrowed money.
Gross Monthly Income
Gross monthly income is your total earnings each month before taxes and other deductions.
Lender
A lender is a bank or financial institution that provides you with a loan.
Interest Rate
The percentage charged by the lender on the loan amount borrowed.
Tenure
The duration or time period within which the borrower must repay the loan.
Monthly Budget
A monthly budget is an estimate of your income and expenses for a specific month.
Mortgage Affordability Calculator
This tool helps you estimate the maximum monthly mortgage payment you may qualify for and the price range of homes you can afford.
Private Mortgage Insurance (PMI)
If your down payment is less than 20% of your home’s purchase price, you may be required to pay for mortgage insurance. With a conventional loan, this coverage comes in the form of private mortgage insurance (PMI). PMI rates vary but are usually lower than FHA insurance rates for borrowers with strong credit.
Federal Housing Administration (FHA) and FHA Loan
The Federal Housing Administration (FHA) is a U.S. government agency that supports homeownership. An FHA loan is issued by banks or other lenders but insured by the FHA, protecting the lender if the borrower defaults. FHA loans are designed to make buying a home more accessible by allowing lower down payments, limiting closing costs, and accepting lower credit scores. These benefits make FHA loans especially popular with first-time buyers who may not have large savings for a traditional down payment.
Department of Veterans Affairs (VA) and VA Loan
The Department of Veterans Affairs (VA) is a U.S. government agency that guarantees VA loans. These loans are available to eligible active-duty service members, veterans, and certain military spouses. Issued by banks and other lenders, VA loans are guaranteed by the VA against borrower default. A key advantage of VA loans is that they typically require no down payment, and they often come with lower interest rates than conventional loans.
