How Much House Can I Afford?
Unsure of how much home you can afford? Use our free calculator to find out how big of a loan you can qualify for given your current monthly income & your monthly debt payments. Current 30-year home loan rates are shown beneath the calculator.
By default this calculator uses a 28% front-end ratio (housing expenses versus income) & a 36% back-end ratio (monthly debt payments versus income), though these are variables in the calculator which you can adjust to suit your needs & the limits set by your lender. 28/36 are historical mortgage industry standers which are considered ideal by lenders & are still used in some automated loan underwriting software programs. Click here for more information about DTI limits for all major loan types.
Mortgage Affordability Calculator
Current Rates on a 30-Year Fixed-rate $364,677 Mortgage
The following table highlights locally available current mortgage rates. By default 30-year purchase loans are displayed. Clicking on the refinance button switches loans to refinance. Other loan adjustment options including price, down payment, home location, credit score, term & ARM options are available for selection in the filters area at the top of the table.
Debt-to-income Mortgage Loan Limits for 2018
Generally speaking, for most borrowers, the back-end ratio is typically more important than the front-end ratio. Here are DTI limits for popular mortgage loans. The soft limits may allow approval using automated underwriting software, whereas the hard limits may require manual approval and other compensating factors like a high credit score or perhaps even a co-signer. If you are seeking a loan for a format without a front-end limit then you can set the front-end box to 100 for 100%, so that the calculator bases your loan limit on the back-end limit you enter.
|Loan Type||Front End||Back End||Hard Limit||Notes|
|Recommended||28%||36%||n/a||Ideal borrower, obtaining a great APR.|
|Conventional||most lenders look at back-end ratio||36% to 43%||45% to 50%||Each lender decided based on a variety of factors.|
|FHA||31%||43%||56.99%||Requires compensating factors to get approved at a high ratio.|
|VA||most lenders look at back-end ratio||41%||~ 47%||Each lender decided based on a variety of factors for each veteran. Lenders have to explain why they approve any loan above a 41% limit. Basic housing & sustience allowance count toward qualifying.|
|USDA||29%||41%||41%||Loans geared toward serving low-income people in rural markets with incomes below 115% of the local median income. More details here|
Can You Afford That Dream House? Figure It Out Yourself
It's Easier Than You Think
With the housing market gaining speed again, more and more people are asking themselves, "How much can I afford without going broke?"
Although calculating loans and interest rates may seem like a daunting task to the layman, there are several advantages to doing the math yourself.
Free online calculators and amortization schedules make it easy to figure out exactly how much down payment is required, how much income you'll need to cover the bills, and what those bills will amount to. Yes, it involves some homework, a fair amount of time, and perhaps making a phone call or two, but you can do it.
You' re already aware that choosing the right home at the right price is one of the most important decisions you'll ever make because it impacts your loved ones and affects nearly everything else you do. Why skimp on the preparation? Spend a lot of time figuring your options, as you'll be spending a lot of time living in your new house, and you want it to be a good fit both physically and financially.
Why Do It Yourself?
There are plenty of tasks that are too difficult for the average person, including doing your own electrical wiring and replacing your own garage door springs...but entering a few numbers into an online tool and clicking your mouse a few times, that's not very difficult.
First of all, no financial consultant or bank loan advisor knows your situation as well as you do. They can't know that you're thinking about taking more frequent vacations; or that you're about to invest heavily in your son's coin collection; or even that you may change jobs in the not-too-distant future. Only you know about your family's spending habits, your lifestyle expectations, and your willingness to compromise.
More importantly, it's highly unlikely that you will pressure yourself into hasty number-crunching or quick decisions like a financial institution might. You can take your time and experiment with different variables (interest rate, monthly expenses, number of years), and you can tinker to your heart's content on your laptop in the wee hours in your pajamas. After all, a banker sees only figures and equations; he doesn't realize that your son is the world's most careless driver or that your business partner has been giving you the cold shoulder lately. No one can predict your financial future, but you can do a better job than someone who barely knows you.
So let's get started!
Saving up to purchase a new home entails the all-important down payment, which greatly affects the overall cost of your house. Currently, you can find loans that move you in with as little as 5% down, but the less you invest upfront, the higher your monthly payment will be.
In a perfect world, your down payment would come out of a savings fund you've set aside for buying a new home, but if you don't have the up-front cash, you may have to tap an Individual Retirement Account (IRA) or 401k plan to realize your dream home. In any case, you should clear up any credit card debt and start building your nest egg as early you can.
But never bite off more than you can chew; buying too much home is one of the biggest financial mistakes buyers can make. You could end up in the house of your dreams with not enough disposable income left over to enjoy life — and precious little for retirement.
Can You Honestly Afford It?
Make the following simple calculations:
- What is the take-home pay of all income-earners? This determines your monthly budget.
- What are the recurring monthly expenses? Include both necessities like the utility bills and optional expenses like your shopping budget and entertainment allowance.
- What new expenses will you incur as a homeowner? These may include condo maintenance fees, water and trash surcharges, and property taxes — just to name a few.
- Subtract your expenses from your monthly budget above. This gives you the amount you have to spend on housing. Don't forget to factor in some wiggle room for emergencies, retirement and your bucket list.
- How much can I afford? Enter your information in our free tools to get an idea.
Let's say the total after-tax income for the household is $120,000, the interest rate is 6.5% over 30 years, and the property taxes and condo fees are $3,500 and $300 respectively. Enter the data above and you have your answer instantly: You can afford a maximum of $1583 per monthly, and at a 6.5% interest rate you can afford a $250,000 home.
Now, change the interest rate to 7% and you have a different picture, and a smaller house.
But notice what happens when you keep the 7% interest rate, and shave your monthly debt from $1,700 to $1,250 by eating in restaurants less often, cutting down on impulse buying, shopping in big-box stores and using coupons; suddenly you can afford a $300,000 mansion.
A word of caution: playing with online calculators is extremely addictive.
Front-End / Back-End Ratios
Another accurate way to calculate how much you can spend on housing is to calculate the front-end and back-end ratios. Simply stated, a front-end ratio is the percentage of your household monthly income you can commit to the loan payment. As a rule, this should not exceed 28%.
MAXIMUM MORTGAGE PAYMENT = ANNUAL INCOME x 0.28 /12 (months)
A back-end ratio shows the maximum amount of your gross annual income that would go to cover all your expenses, including your mortgage, and that figure ideally should be below 36%.
MAXIMUM MORTGAGE PAYMENT = ANNUAL INCOME x 0.36 /12 (months) - OTHER MONTHLY DEBT PAYMENTS
Don't Forget the Extras
Just as you would equip a brand new car with seat covers and an alarm system, you'll want to set aside some extra money to spend on new furnishings and accent pieces for your new abode. You may also face some hefty closing costs before you can move in, and you can't overlook the substantial expense involved in moving all your belongings in a truck. There may well be other costs that are less obvious, such as your commuting costs if your new home is further away from your workplace. Always budget a little extra for the Murphy's Law factor.
With a little help from our free tools and a bit of research, you can quickly tell which houses you can afford and which ones you can't.
The above calculator is quite accurate for most home loans. There is one area where a recursive loop happens, and that is in some rare edge cases when calculating the property mortgage insurance (PMI) for a loan where the down payment is just below 20% of the home's value.
If your down payment is 20% or more of the calculated max home value (or above 25% of the calculated max loan value) then PMI will be calculated as zero & will not impact other calculations. If your calculation is well below 20% then the calculator re-calculates the payments by subtracting the PMI payments from the maximum monthly payments & then calculates the associated loan amount.
If your downpayment amounted to something like 19.9% of the home's value, then when the loan re-calculates to subtract PMI from the monthly payments the new lower max loan size might shift that downpayment ratio to slightly above 20%, which would mean PMI is not required. For these close edge-case calculations you can enter the PMI rate as zero to exclude it from your calculations & then add a bit more to your downpayment to reach 20% of the home's value and bypass the PMI requirement.