Before house hunting, know your real budget. This calculator uses the 28/36 rule lenders apply: max 28% of income for housing and max 36% for total debt. Factor in your down payment and current debts to find your true price range.
Click Calculate to see the maximum home price and mortgage amount.
The Formula
Uses the standard 28/36 rule: housing costs should not exceed 28% of gross income, and total debt should not exceed 36%. Reverse-mortgage formula: P = M * [(1-(1+r)^-n)/r] where M is max payment, r is monthly rate, n is number of payments.
Why It Matters
You earn $90,000/year with $500/month in car payments and a $60,000 down payment. Lenders using the 28/36 rule say you can afford up to $355,000. However, your true budget may be lower when factoring in property taxes, insurance, and HOA fees not captured by the basic formula.
Frequently Asked Questions
What is the 28/36 rule?
The 28/36 rule is a guideline lenders use to evaluate mortgage affordability. It states that your housing costs (principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income, and your total debt payments (housing plus car loans, student loans, credit cards, etc.) should not exceed 36% of your gross monthly income. This helps ensure you can manage a mortgage without overextending your finances.
What counts as debt for the 36% ratio?
Total debt includes all recurring monthly obligations: car loan payments, student loan payments, minimum credit card payments, personal loan payments, child support or alimony, and any other installment debts. One-time expenses, credit card balances you plan to pay in full each month, and everyday living expenses like groceries or utilities are not included. Lenders will review your credit report and monthly budget to identify these obligations.
Should I put 20% down on a mortgage?
A 20% down payment eliminates the need for private mortgage insurance (PMI), which can cost 0.5-1% of your loan amount annually. It also gives you immediate equity and may qualify you for better interest rates. However, if mortgage rates are low and you can earn less than that rate on your savings, it may make sense to put less down and invest the difference. First-time homebuyer programs often allow 3-5% down with favorable terms.
How can I improve my mortgage affordability?
You can improve affordability by paying down existing debts to lower your debt-to-income ratio, increasing your down payment to reduce the loan amount, or looking at loans with longer terms (e.g., 30-year instead of 15-year) which lower monthly payments. Improving your credit score can also secure a lower interest rate, which significantly reduces monthly costs. Some buyers also consider piggyback loans or assumable mortgages to stretch their budget.
What about closing costs?
Closing costs typically run 2-5% of the loan amount and include appraisal fees, title insurance, attorney fees, recording fees, and prepaid items like property taxes and homeowners insurance. You can negotiate with your lender to include some closing costs in the loan (called lender credits), or ask the seller to contribute toward closing costs, especially in a buyer's market. Budget for these costs separately from your down payment.