X

75% of the top 100 metropolitan areas have now achieved full home price recovery. Is yours one of them?

75% of the top 100 metropolitan areas have now achieved full home price recovery. Is yours one of them?

How Much House Can I Afford?

To determine how much house you can afford, use this home affordability calculator to get an estimate of the property price you can afford based upon your income and debt profile. Generally, lenders cap the maximum monthly housing allowance (including taxes and insurance) to lesser of Front End Ratio (28% usually) and Back End Ratio (36% usually). 

Prequalifying for a mortgage is simple, and is intended to give you a working idea of how much mortgage you can afford. Combine this amount with your down payment, and you'll answer your question of “how much house can I afford?” This is not the same as being preapproved for a loan, which involves placing an application and providing documentation to a lender.  

Remember -- this is just a guide. Your final amount will vary depending on a number of factors, especially interest rate, which will be based on your credit score. When you're ready, a lender can give you a more exacting figure.

How to calculate how much house you can afford

To produce estimates, both Annual Property Taxes and Insurance are expressed here as percentages. Generally speaking, and depending upon your location, they will generally range from about 0.5% to about 2.5% for Taxes, and 0.5% to 1% or so for Insurance.

Front End and Back End debt ratios are to determine how much of your monthly gross income can be used for your mortgage debt (front end) and how much can be used to satisfy all your regular obligations (back end). The 28% and 36% ratios are standard in the mortgage world, but lenders may have other combinations available, such as 33%/38%.

Home Affordability Calculator

L O A D I N G

Please enter gross annual income greater than 0

Please enter monthly debt payments greater than 0

(Car payments, credit cards, student loan payments, etc.)

Please enter down payments greater than 0

Please enter interest rate greater than 0

Please enter loan term greater than 0

Please enter property tax greater than 0

Please enter property insurance greater than 0

Please enter front end ratio greater than 0

Please enter back end ratio greater than 0

Home value you can afford
-
Down Payment
-
Down Payment percent
-
Principal + Interest payment
-
Taxes and Insurance
-
Monthly PMI
-
Detailed calculations
Generally, lenders cap the maximum monthly housing allowance (including taxes and insurance) to lesser of Front End Ratio (28% usually) and Back End Ratio (36% usually).
-
Monthly Gross Income
-
Payment for Front End Ratio
Front End Ratio
-
-
Payment for Back End Ratio
Back End Ratio
-
Monthly Debts
-
Percent of Gross Income
-
Maximum Available for Mortgage Payments
-
  • Income. First, add up the income that will be used to qualify for the mortgage, including bonuses and commissions. Make sure you have the documentation to prove every source of income; otherwise it cannot be counted when you meet with a mortgage lender.
  • Debt. Add all the payments you make each month for car loans, credit cards, student loans and any other debt. Based on your income, there are limits on how much debt you'll be allowed to carry, including your mortgage. These debts will limit how much mortgage you can borrow.
  • DTI ratio. When a mortgage lender calculates your level of debt based upon how much money you make, it is known as your “debt-to-income (DTI) ratio.” Debt-to-income ratios are the province of mortgage calculators. One important ratio, referred to by mortgage professionals as your "front-end" or "top-end" ratio, is calculated by taking your proposed housing expense divided by your gross (before-tax) income. Many mortgage calculators set 28 percent as the desirable value for this ratio. The other ratio involves all of your loan payments – your housing expenses and your monthly debts (but not utilities or other living expenses) -- divided by your gross monthly income. A home affordability calculator frequently set this number at 36 percent. This is called your "back-end" or "bottom-end" ratio.
  • Monthly obligations. While your mortgage lender cares about your auto and credit card payments, they really don’t care whether you have cable TV, the latest iPhone or even that you eat on a regular basis. Those monthly expenses are up to you to include, and cable, smartphones and a few trips to the grocery store can easily add up to several hundred dollars each month.
  • Down payment. The minimum down payment for an FHA loan is 3.5 percent; for conventional loans, the minimum is 3 percent for certain buyers and 5 percent for most buyers.
  • Taxes. Today, it’s easy to get an idea on a home’s property taxes by looking at the listing online. You can also get in contact with the county tax office or ask a local Realtor to investigate for you. Most homeowners will have their property taxes paid from an escrow account attached to their monthly mortgage payments. One percent in taxes is equal to $1,000 per year for a $100,000 home.
  • Insurance. Lenders require homeowners insurance to cover your property. Contact an insurance company or ask a Realtor to estimate your homeowners insurance costs which will vary according to the type of property, cost and features of the home, and its location. To get a rough idea, you can ask a family member or friend what they pay for insurance (if their home is similar to the home you are interested in buying).
  • Homeowners association dues. If the property you purchase includes monthly dues, don't forget to include those fees in your monthly payments.
  • Mortgage insurance. If you make a down payment of less than 20 percent on a conventional loan, you will need to pay mortgage insurance. You can utilize HSH.com's mortgage insurance calculator to see how much this could cost each month. For FHA loans, there is an upfront and annual mortgage insurance premium.
  • Interest rate. You can check today's mortgage rates at HSH.com, but remember that your rate will depend on your credit score, the type of property you are buying, and the choices you make regarding fees and points. A lender will be able to give you a customized mortgage quote given your situation.
  • Loan term. While many buyers opt for a 30-year home loan, if you can afford higher monthly payments, you may want to consider a shorter loan term. Shorter loans have lower interest rates and cost you less over the life of the loan.

For an example calculation, lets use a $60,000 annual income, $250 in monthly debt payments, $20,000 to use as a down payment, property taxes of 1.25% of the property price you can qualify for and annual homeowner's insurance premiums of about 0.5% of the value of the home.

With a 4% interest rate and a 30-year term, and using a 28% housing ratio, this means you can utilize $1,400 per month for Principal, Interest, Taxes and Insurance; with your down payment of just 8.89% of the purchase amount, Private Mortgage Insurance costs will also be  included in that $1,400 figure.

$1,400 per month qualifies to borrow a mortgage of $204,913; add your $20,000 down payment to this, and you can purchase a home of $224,913.

Your debt load as a percentage of your income is low enough so that the back-end "cap" of 36% of your monthly gross income doesn't come into play. In fact, the 36% cap means you can carry as much as $400 per month in debts and still qualify for the amount above.

If your debts are above 36%, don't worry. Fannie Mae and Freddie Mac are now backing loans with back-end debt ratios of as much as 50%. While less debt is better, more doesn't necessarily mean you can't qualify for a mortgage large enough to buy a great home.

Related articles :