How lenders decide what you can borrow
Lenders compare your monthly costs with your gross (before-tax) monthly income, as debt-to-income ratios (DTI):
- Housing (front-end): the whole monthly housing cost (principal and interest, property tax, homeowners insurance, mortgage insurance and HOA dues) as a share of income. A long-standing rule of thumb is 28%.
- All debts (back-end): housing plus every other monthly debt payment: car and student loans, credit card minimums, child support. The matching rule of thumb is 36%.
The lower of the two limits sets your budget. With a high car payment, it's usually the second. Rent, utilities, groceries and phone bills don't count as debts, though they still come out of the same paycheck.
How the calculator finds the price
First it works out the most housing can cost each month: the housing limit, or the total limit minus your other debts, whichever is lower. Then it searches, to the dollar, for the highest price whose first monthly payment fits inside that amount. The payment comes from the same schedule as the mortgage calculator, so it includes:
- principal and interest on the loan (price minus your cash);
- property tax, entered as a percent of the price, so it grows as the price does;
- homeowners insurance and any HOA dues;
- PMI on a conventional loan with less than 20% down, FHA's annual premium, or USDA's annual fee. FHA's upfront premium, the VA funding fee and USDA's upfront fee are added to the loan.
The price is also capped by the program's minimum down payment: 3% for conventional loans and 3.5% for FHA. The result says which limit set the answer, and the table under it repeats the search at rates from 1% below to 1% above yours.
Examples
A household earning $100,000 a year with $500 a month of other debts and $40,000 saved can spend 28% of income, $2,333 a month, on housing. At 6.5% over 30 years, with property tax of 1.1% of the price and $1,800 a year of insurance, that buys a home of about $320,500. What changes the answer:
- The rate. At 5.5% it's about $346,200; at 7.5%, about $297,800.
- Other debts. With $1,200 a month of other debts instead of $500, the 36% limit takes over: $3,000 less $1,200 leaves $1,800 for housing, and the answer drops to about $250,800.
- The term. Over 15 years instead of 30, the same budget buys about $253,700, because more of each payment goes to principal.
- HOA dues. $200 a month of dues brings it down to about $294,300.
Now the same household with an FHA loan at 31/43. Housing can take 31% of income, $2,583 a month, and the price rises to about $348,700, with about $128 a month of FHA mortgage insurance. With only $10,000 saved, though, FHA's 3.5% minimum caps the price at $285,714, even though the income would stretch further.
And with a VA loan, no down payment and the ratios set to 41/41 (VA looks at the total), the answer is about $375,200. The first-use funding fee is added, making a loan of about $383,300. There's no monthly mortgage insurance.
Limits by loan program
- Conventional: Fannie Mae's Selling Guide limits the total ratio. For manually underwritten loans the maximum total ratio is 36%, or up to 45% with the required credit score and reserves; loans run through its automated system, Desktop Underwriter, can go up to 50%. PMI applies with less than 20% down. Some programs, such as Fannie Mae's HomeReady, allow as little as 3% down, with income limits and other conditions.
- FHA: in HUD's Handbook 4000.1, manually underwritten loans are held to 31/43. Borrowers with a credit score of 580 or more can go to 37/47 or 40/50 with compensating factors such as cash reserves; below 580, or with no score, 31/43 is the limit. FHA needs at least 3.5% down with a score of 580 or more, and its mortgage insurance is part of the monthly cost.
- VA: VA's underwriting rule uses a total ratio of 41% together with residual income: what's left of your monthly income after housing costs and other debts, measured against a table by family size, region and loan amount. A ratio above 41% can be approved with justification. There's no down payment as long as the price isn't above the appraised value, and no monthly mortgage insurance.
- USDA: for homes in areas USDA designates as rural, with household income limits. Its rules use 29% for housing (including the annual fee and HOA dues) and 41% for all debts, which can be exceeded with compensating factors. The loan can be up to the home's market value, so no down payment is needed.
Besides the 28/36, 31/43 and 36/45 presets, you can type any pair, such as 29/41 for USDA. The calculator doesn't check residual income, credit or program eligibility.
Things to check
- Use income you can document. Enter income before tax, and ask your lender which income it will count toward the ratios.
- Keep cash for closing. The calculator treats all your cash as down payment. Closing costs and savings for repairs come out of the same money, so enter what you'd really put down.
What a lender approves isn't what you have to spend
The limits are a ceiling, not a target. They leave out saving for retirement, childcare, commuting and repairs. A common approach is to find the most you could borrow here, then lower the housing limit to see what a comfortable payment would buy. Use the link under the result to open the loan in the mortgage calculator and see its full schedule, or put two price levels side by side with compare mortgages.
Common questions
What is the 28/36 rule?
A rule of thumb: housing at no more than 28% of gross income, and all debts at no more than 36%. It's the calculator's starting point, not a legal limit; each program sets its own.
Is debt-to-income based on gross or take-home pay?
Gross, before tax and other deductions. Your take-home pay is lower, so the payment feels bigger.
How much house can I afford on $100,000 a year?
With the inputs in the example above, about $320,500 at 6.5%. Your debts, cash, rate and local taxes change it, so enter your own.
Does a bigger down payment help?
Yes: less is borrowed, and a conventional loan has no PMI at 20% down. When the minimum down payment is the limit, more cash raises the price directly.