Mortgage affordability

How this calculator works

Lenders commonly use the 28/36 rule: housing costs should stay under 28% of gross monthly income, and all debt payments together under 36%. The calculator takes the lower of those two limits, subtracts taxes, insurance, and HOA dues, and works backward to the largest loan that fits. Your down payment is added on top to find the maximum price.

A worked example

The example household earns $120,000 a year, which is $10,000 a month, and pays $600 a month on other debts. The 28% limit allows $2,800 for housing. The 36% limit allows $3,600 for all debts, which leaves $3,000 for housing after the $600. The lower of the two, $2,800, is the ceiling.

Working backward at 6.5% over 30 years, with 1% property tax and $2,000 a year of insurance, that payment supports a loan of about $361,103. Adding the $60,000 down payment gives a maximum price of about $421,103. The down payment is 14.2% of that price, so the result carries a warning: mortgage insurance would apply and would lower the price somewhat.

If the other debts were $1,200 a month, the 36% limit would take over, the ceiling would fall to $2,400, and the maximum price would drop to about $365,190.

How to read your results

The result is a ceiling, not a recommendation. It is the most a lender following the traditional guideline would be comfortable with, based on income before taxes. It does not know about your childcare, your retirement saving, or how much you like to travel.

The rows show how the housing payment divides between principal and interest, property tax, and insurance. Change the rate by a point to see how sensitive the price is: at 7.5% the example falls from about $421,000 to about $390,000.

Common mistakes to avoid

• Borrowing the maximum. A payment at the limit leaves little room for anything else. Many buyers choose a price well below what they are approved for.
• Leaving debts out. Car loans, student loans, and credit card minimums all count toward the 36% limit, and they often decide the answer.
• Using an outdated rate. The price you can afford moves with interest rates. Use the rate lenders are quoting you today.
• Forgetting the costs of buying and owning. Closing costs, moving, furniture, and maintenance of about 1% of the price a year are not in this number.